The numbers: The cost of goods and services rose a scant 0.1% in March and the yearly rate of inflation slowed again in response to higher interest rates and a cooler economy.
The increase in the so-called personal consumption expenditures index matched the Wall Street forecast. The PCE index is the Federal Reserve’s preferred inflation barometer.
The…
Series I bonds had a good two-year run at the top of the interest-rate heap, but the next 6-month rate that will be announced on May 1 is likely to fall so low that buyers probably won’t show up in record-breaking numbers.
I-bonds are priced based on two factors: a variable rate based on six months of inflation data (from October through March) and a fixed rate that is less transparently calculated. The latest CPI numbers for March indicate that the variable rate is going to pan out at an annualized rate of 3.38%, down from…
U.S. stock indexes traded mostly higher on Tuesday as investors cautiously looked ahead to March’s inflation data due Wednesday that could determine the Federal Reserve’s next interest-rate move, as well as to the start of the corporate earnings reporting season on Friday.
On Monday, the Dow Jones Industrial Average rose 101 points, or 0.3%, to 33,587, the S&P 500 increased 4 points, or 0.1%, to 4,109, and the Nasdaq Composite dropped 4 points, or 0.03%, to 12,084.
Wall Street’s main stock indexes mostly advanced Tuesday afternoon, as investors awaited the release of March’s consumer price index and the start of the first-quarter earnings season, with the banking sector slated to report numbers later this week.
The S&P 500 index sits less than 0.5% off its best level since mid-February as investors have become more relaxed about prospects for the U.S. economy and more accepting of the path of Federal Reserve policy.
The March employment report released last Friday showed a steady pace of job creation but with no great sign of accelerating wage inflation, which helped calm fears of a sharp economic slowdown and faster Fed interest rate hikes.
See: Why March’s CPI report could upset the stock market, seal the deal on the next rate hike
But now attention turns to the March’s consumer price index report due Wednesday, which is seen as one of the last key data points before the Federal Reserve’s next interest-rate move.
The March CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 5.2% rise from a year earlier, slowing from a 6% year-over-year rise in the previous month, according to a survey of economists by Dow Jones.
Core CPI, which strips out volatile food and fuel costs, is expected to rise 0.4% from a month ago, or 5.6% year over year. The increase in the core rate over the 12-month period dipped to 5.5% in February.
Meanwhile, data from China on Tuesday showing consumer inflation dipped to its lowest level in more than a year in March, is also helping ease fears about global price pressures.
Investors are wondering whether the Fed is satisfied with what it has done to fight inflation, and whether the central bank has done too much that it would drag the U.S. economy into a recession, according to Kristina Hooper, chief global market strategist at Invesco.
“Tomorrow’s data point will only help us answer that first question,” Hopper said. Meanwhile, “while CPI is important, it’s just one data point. Hopefully it will confirm what we’ve seen with other data points that there’s significant progress in fighting inflation, and hopefully that’s enough to satisfy the Fed,” Hooper said in a call.
Seema Shah, chief global strategist at Principal Asset Management, expects the decline in inflation in 2023 will likely be “incomplete with inflation remaining above central bank targets,” complicating its policy decisions.
“Global inflation is moderating, but so far this deceleration has been largely driven by last year’s energy price spike unwind. Core inflation remains uncomfortably high and, in some economies, continues to rise,” Shah said in emailed comments on Tuesday.
“Central banks have made less progress towards disinflation than they had hoped. Inflation is likely to remain sticky and will still sit above central bank targets at year-end,” Shah said.
See: High inflation and interest rates to hobble U.S. and global economies for several years, IMF says
The U.S. and global economies are likely to struggle to grow over the next few years as countries fight to reduce high inflation and cope with rising interest rates, the International Monetary Fund said Tuesday.
Meanwhile, the IMF said recent stress in the banking sector could reduce the ability of U.S. banks to lend over the next year, and materially lower U.S. economic growth.
The IMF estimated that lending capacity in the U.S. could fall by almost 1% in the coming year. That would reduce U.S. real gross domestic product by 44 basis points over that time frame, all else being equal, the IMF said.
Then, on Friday, the first-quarter corporate earnings season kicks into gear with the’ financial sector in the vanguard.
It’s particularly important to pay attention to earnings calls and guidance provided by companies’ management, noted Hooper. “That to me is where we’re likely to get the best insights or at least the most robust insights into current credit conditions, to understand what could happen to the economy,” Hooper said.
Philadelphia Fed President Harker will be speaking at 6:30 p.m. and Minneapolis Fed President Kashkari is due to speak at 7:30 p.m. Both times Eastern.
— Jamie Chisholm contributed to this article
The U.S. and global economies are likely to struggle to grow over the next few years as countries fight to reduce high inflation and cope with rising interest rates, the IMF said Tuesday.
The latest projections paint a gloomy picture of the challenges facing the world. Chief among them is high inflation, a problem the IMF said has proven stickier than expected compared to “even a few months ago.”
Price increases in goods and services other than food and gasoline are still high, the IMF said, and a tight labor market could keep upward pressure on wages.
Inflation globally is likely to average about 7% in 2023, up almost 1/2 point from the IMF estimate just three months ago.
The fund said inflation probably won’t return to the low levels that prevailed around the world until “2025 in most cases.” In the U.S., for example, inflation rose less than 2% a year in the decade before the pandemic.
Stubbornly high inflation, in turn, is likely to force the U.S. and other countries to keep interest rates high for some time.
“This may call for monetary policy to tighten further or to stay tighter
for longer than currently anticipated,” IMF director of research Pierre-Olivier Gourinchas said.
Yet rising interest rates and higher borrowing costs also risk destabilizing financial institutions as witnessed by the failure of Silicon Valley Bank in the U.S. and the emergency rescue of Switzerland-based Credit Suisse.
Recent banking instability reminds us,” Gourinchas said, “that the situation remains fragile.”
“Once again, the financial system may well be tested even more,” he added. “Nervous investors often look for the next weakest link, as they did with Crédit Suisse.”
Threats to banks could add to the stress on the economy by spurring them to lend less to businesses and consumers. Lending is critical for economic growth.
“We are therefore entering a tricky phase during which economic growth remains
lackluster by historical standards, financial risks have risen, yet inflation has not yet
decisively turned the corner,” Gourinchas said.
The U.S. economy is forecast to slow from 2.1% growth in 2022 to 1.6% in 2023 and 1.1% in 2024. Notably, the IMF does not predict a U.S. recession.
By contrast, the Federal Reserve predicts U.S. growth will slow to just 0.4% in 2023 and then rebound to a 1.2% annual pace in 2024.
Most countries in Europe are also expected to keep growing aside from the U.K. and Germany, whose economies have been harder hit by high energy prices.
The world economy is forecast to expand 2.8% in 2023 and 3% in 2024, a shade lower compared to the IMF’s forecast in at the start of the year.
Looking out to 2028, global growth is forecast at 3%, the weakest five-year outlook since the IMF began publishing them 33 years ago.
First-quarter earnings season kicks off this week. Results from big U.S. banks later in the week will be heavily scrutinized for the impact of the past month’s turmoil in the sector. Economic-data highlights will include the latest inflation data and minutes from the Federal Open Market Committee’s late-March meeting.
Albertsons
and
CarMax
will report on Tuesday, followed by
Delta Air Lines
and
Fastenal
on Thursday. Things pick up on Friday:
Citigroup
BlackRock
and
UnitedHealth Group
are all scheduled to release their first-quarter results.
Housing inflation has remained hot in recent months—but it could be approaching a turning point, according to a
Zillow
economist.
Housing costs—both the cost of buying or renting—climbed earlier in the pandemic. While data show that prices in both categories have cooled in recent months, the industry’s contribution to inflation has remained hot.
The numbers: The cost of U.S. goods and services rose by a milder 0.3% in February, perhaps a sign the Federal Reserve’s fight against high inflation is showing grudging progress.
Prices had risen by a sharp 0.6% in January, based on the so-called PCE index.
The yearly increase in prices declined to 5% from 5.3% in the prior month, the government said Friday, marking the lowest level in more than a year and a half.
That’s still about three times the rate of inflation before the pandemic, however.
Senior Federal Reserve officials have signaled they plan to raise interest rates just once more before pausing to determine how much a sharp increase in borrowing costs brings down inflation. The Fed has jacked up its key short-term U.S. rate to a top end of 5%, a remarkably fast acceleration from nearly zero one year ago.
Higher interest rates temper inflation by slowing the economy, but the effects can sometimes take up to a year or more to be fully felt. The Fed wants to avoid going too far or cause any more stress on the U.S. financial system after the failure of Silicon Valley Bank.
After the PCE report, Boston Federal Reserve President Susan Collins said the central bank “has more work to do” to get inflation lower in an interview with Bloomberg.
Key details: The more closely followed core index also increased 0.3% last month, matching Wall Street’s forecast.
The core rate of inflation in the past 12 months slipped to 4.6% from 4.7%.
The PCE is viewed by the Fed as the best predictor of future inflation trends. It is formally known as the personal consumption expenditures price index.
The central bank pays especially close attention to the core gauge that strips out volatile food and energy costs.
Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their buying habits due to rising prices.
They might substitute cheaper goods such as chicken thighs for more expensive ones like boneless breasts to keep costs down. Or buy generic medicines instead of brand names.
The CPI showed inflation rising at a 6% yearly rate in February.
Big picture: The Fed is trying to straddle a fine line: Bring inflation back down to its 2% target, but without causing a severe economic reaction.
Whether the Fed will be able to hold the line on just one more rate hike is far from certain.
If inflation stays high, the central bank would have to end its pause on rate hikes and risk a recession. A slim majority of economists, in fact, already believe a downturn is imminent.
Steadily falling inflation, on the other hand, could allow the Fed to pull a rabbit out of the proverbial hat.
Looking ahead: “For an economy looking to avoid recession, this was a good report,” said Robert Frick, corporate economist at Navy Federal Credit Union.
“For the Fed, it could be one and done in May,” said senior economist Sal Guatieri of BMO Capital Markets.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
rose in Friday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
declined several basis points to 3.53%.
By Xavier Fontdegloria
Spain’s inflation rate eased more than expected in March, reaching its lowest level in 20 months as energy prices sank from a year earlier, when Russia’s invasion of Ukraine sent them surging.
The consumer price index–which measures what consumers pay for goods and services–increased 3.1% in March on year measured by European Union-harmonized standards, down sharply from the 6% on-year rise registered in February, preliminary data from the Spanish statistics office INE showed Thursday.
This marks the lowest inflation rate since July 2021, and came in below the 4.2% expected by economists in a poll from The Wall Street Journal.
The consumer price index rose 3.3% in March by national standards, easing from the 6% increase seen in February.
The marked decrease in annual inflation was mainly driven by lower energy prices than a year before, when the war in Ukraine began. Electricity and fuel prices fell in March while they increased the same month a year earlier, INE said.
Core inflation–which exclude the more volatile categories of food and energy–slowed slightly to 7.5% in March from 7.6% in February.
Compared with the previous month, consumer prices rose 0.4% by national standards and increased 1.1% by EU-harmonized standards, INE said.
Spanish inflation is expected to average 3.7% in 2023, down from 4.9% previously anticipated, according to projections from the Bank of Spain. However, core inflation is expected to ease at a slower pace than headline inflation, according to the bank’s March economic bulletin.
Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com
The numbers: The U.S. economy accelerated in March, S&P Global surveys showed, but so did inflation as companies raised selling prices.
The S&P Global Flash U.S. services-sector index rose to an 11-month high of 53.8 from 50.5 in the prior month. Most Americans are employed on the service side of the economy.
The S&P Global U.S. manufacturing sector index, meanwhile, increased to 49.3 from 47.3. That’s a five-month high.
Any number above 50 points to expansion. Figures below that signal contraction.
The S&P Global surveys are among the first indicators each month to assess the health of the economy.
Key details: New orders, a sign of future sales, rose for the first time since last September at service-oriented companies.
Booking at manufacturers fell again, but at the slowest pace in six months. More positively, production increased for the first time since last September.
Employment rose across the economy as both service companies and manufacturers said they added new workers.
On the downside, the increase in demand allowed companies to raise prices at the fastest pace in five months.
Business leaders said rising costs, especially labor, contributed to their decision to raise prices.
That’s not good news for Federal Reserve officials who worry that rising wages could make it harder to get high inflation under control.
Big picture: The service and industrial sides of the economies are following different trajectories.
Americans are spending relatively more money on services such as travel and eating out and spending less on goods. As a result, service companies are still hiring and growing at a faster clip.
Manufacturers are basically treading water due to the shift in consumer spending patterns as well as the depressive effects of higher inflation and interest rates.
Adding it all up, though, the S&P reports paint the picture of a expanding economy that is not on the doorstep of recession.
What remains to be seen is how much the recent stress in the banking sector hurts lending and makes it harder for businesses to borrow and invest.
Looking ahead: “March has so far witnessed an encouraging resurgence of economic growth,” said Chris Williamson, chief business economist at S&P Global.
“There is also some concern regarding inflation,” he said. “The inflationary upturn is now being led by stronger service sector price increases, linked largely to faster wage growth.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell in Friday trades.
The numbers: A survey of consumer sentiment slid to 63.4 in March and fell for the first time in four months, reflecting angst among Americans about high inflation and the health of the economy.
The preliminary reading in March was down from 67 in February, the University of Michigan said. Most of the survey was completed before the collapse of Silicon Valley Bank.
Consumer sentiment helps gauge how Americans feel about their own finances as well as the broader economy.
The index had fallen to a record low of 50 last summer before partly rebounding. Sentiment is still well below a recent peak of 88.3 in 2021, however, and a pre-pandemic high of 101.
Inflation expectations tapered off a bit but remained fairly high. Consumers expect prices to increase 3.8% in the next year, down from 4.1% in the prior month. That’s the lowest reading since April 2021.
Key details: A gauge that measures what consumers think about the current state of the economy dropped to 66.4 in March from 70.7in the prior month.
Sentiment fell the most among lower-income and younger Americans who tend to suffer disproportionately from high inflation. Some wealthier people with large stock holdings were also less confident in light of a recent decline in equities.
Another measure that asked about expectations for the next six months declined to 61.5 from a prior 64.7.
Americans think inflation will persist for some time. In the longer run, consumers believe inflation will increase about 2.8% a year, down slightly from 2.9% in the prior month.
That’s still well above the Federal Reserve’s 2% target, however.
Fed officials pay close attention to inflation expectations because they could be a harbinger of future price trends.
The rate of inflation over the past 12 months is 6%, based on the consumer-price index. It’s fallen from a 40-year peak of 9.1% last summer.
Big picture: Consumer sentiment is still far below levels associated with a healthy economy and it’s hard to see a big improvement anytime soon.
The Fed is raising interest rates to tame high inflation, a strategy that typically slows the economy.
Higher rates have also destabilized parts of the U.S. financial system as witnessed by the sudden collapse of Silicon Valley Bank. That’s adding new stress on the economy.
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
fell in Friday trades amid nagging worries about the U.S. financial system after the SVB failure
The stock market is ending February on a decidedly wobbly note, raising doubts about the durability of an early 2023 rally.
Blame stronger-than-expected economic data and hotter-than-expected inflation readings that have forced investors to again rethink their expectations around how high the Federal Reserve will drive interest rates.
“The idea that equity markets would experience a strong upside surge while the Fed was still hiking and the market was underestimating what Fed was going to do” had looked “untenable,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a phone interview.
Market participants have come round to the Fed’s way of thinking. At the end of January, fed-funds futures reflected expectations the Fed’s benchmark interest rate would peak below 5% despite the central bank’s own forecast for a peak in the 5% to 5.25% range. Moreover, the market was forecasting the Fed would deliver more than one cut by year-end.
That view began to shift after the release of a January jobs report on Feb. 3 that showed the U.S. economy added a much larger-than-expected 517,000 jobs and showed a drop in the unemployment rate to 3.4% — its lowest since 1969. Throw in hotter-than-expected January consumer and producer price index readings and Friday’s bounce in the core personal consumption expenditures price index, the Fed’s favored inflation measure, and the market’s outlook on rates looks much different.
Participants now see the Fed raising rates above 5% and holding them there through at least year end. The question now is whether the Fed will bump up its forecast of where it expects rates to peak at its next policy meeting in March.
That’s translated in a backup in Treasury yields and a pullback by stocks, with the S&P 500 down around 5% from its 2023 high set on Feb. 2, leaving it up 3.4% in the year to date through Friday.
It isn’t just that investors are learning to live with the Fed’s expectation for rates, it’s that investors are realizing that bringing down inflation will be a “bumpy” process, said Michael Arone, chief investment strategist for the SPDR business at State Street Global Advisors, in a phone interview. After all, he noted, it took former Fed Chairman Paul Volcker two recessions in the early 1980s to finally crush a bout of runaway inflation.
The run to the S&P 500’s Feb. 2 high was led by what some analysts derisively called a “dash for trash.” Last year’s biggest losers, including highly speculative shares of companies with no earnings, were among the leaders on the way back up. Those stocks suffered particularly last year as the Fed’s aggressive cadence of rate hikes sent Treasury yields up sharply. Higher bond yields make it harder to justify holding stocks whose valuations are based on earnings and cash flow projected far into the future.
Inflation readings this month have all been hotter than expected, resulting in the “reversal of everything that was working” previously, Arone noted. The 10-year Treasury yield had fallen, the dollar was weakening, which means that highly speculative, volatile stocks are giving back leadership to companies that benefit from rising rates and inflation, he said.
The energy sector was the sole winner among the S&P 500’s 11 sectors in the past week, while materials and consumer staples outperformed.
The Dow Jones Industrial Average
DJIA,
dropped 3% last week, leaving the blue-chip gauge down 1% so far in 2023, while the S&P 500
SPX,
slid 2.7% and the tech-heavy Nasdaq Composite
COMP,
dropped 1.7%. The Nasdaq trimmed its year-to-date gain to 8.9%.
Goodwin sees scope for stocks to fall another 10% to 15% as the economy slides toward recession. She said that while earnings results showed bottom line results continue to hold up relatively well for tech and consumer discretionary sectors, top line revenues are decelerating — a troubling mismatch. Outside of the pandemic winners, companies are struggling to maintain profit margins, she noted.
Indeed, margin trouble could be the next big worry, Arone said.
Net margins are below the five-year average because businesses have reached a limit when it comes to passing on price increases customers.
“My view is this will remain a headwind for the outlook for stocks and one that’s a bit under the radar,” he said. That might explain why sectors that still enjoy high margins or are able to increase margins — such as the aforementioned energy and industrials — were outperforming the market at the end of the past week.
The dash for trash has hit a speed bump. Stocks faltered again this past week as the early-year rally, led by rebounds in 2022’s speculative-grade losers, ran into resistance from higher expected interest rates from the Federal Reserve in the wake of persistent inflation readings and few signs that growth is faltering.
Economists at an array of major Wall Street banks, including Goldman Sachs, Bank of America, and Citigroup, lifted their forecasts of the eventual peak in the central bank’s target range for the overnight federal-funds rate, to 5.25% to 5.50%, effectively bringing them in line with the fed-funds futures market. Deutsche Bank now is expecting a 5.6% single-point peak, up a half-percentage-point from its previous estimate, and among the highest forecasts.
Eurozone inflation eased more than expected in January, reaching an eight-month low, but price pressures persisted beyond energy as the European Central Bank gets ready for further interest-rate increases.
Consumer prices rose 8.5% in January compared with the same month a year earlier, down from a 9.2% increase in December, according to preliminary data from the European Union’s statistics agency Eurostat released Wednesday.
This marks the lowest inflation rate since May, after three consecutive declines following a record high of 10.6% in October.
Economists polled by The Wall Street Journal expected inflation to fall to 9.1%.
The decline in inflation was driven by moderating energy prices, which increased by 17.2% compared with a 25.5% rise in December. However, food, alcohol and tobacco prices climbed 14.1% on year, accelerating from the 13.8% increase recorded the previous month.
The core inflation rate–which strips out the more volatile categories of food and energy–stood at 5.2% in January, unchanged from December.
The European Central Bank raised interest rates at an unprecedented pace in 2022 in order to tame high inflation. The bank is widely expected to raise interest rates by 50 basis points on Thursday, which would bring the deposit rate to 2.50%, and further increases are expected as the eurozone’s economy is proving more resilient than anticipated and inflation remains high.
Eurozone inflation data for January includes an estimate for Germany as the official release has been postponed to next week due to technical problems.
Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com
The numbers: The employment cost index slowed at the end of 2022 for the third quarter in a row, but worker compensation still rose a sharp 1% and didn’t offer much comfort to the Federal Reserve as it fights to tame inflation.
Economists polled by The Wall Street Journal had forecast a 1.1% increase in the ECI in the fourth quarter.
Although trending in the right direction, labor costs are still rising far faster than the Fed would like.
Compensation climbed at a 5.1% clip in the 12 months ended in December — up from 5% in the prior quarter — to leave the increase in worker pay near the highest level in 40 years.
By contrast, wages and benefits rose an average of 2.7% a year from 2017 to 2019.
Read: Workers love big raises. The Fed, not so much. Why pay has a big role in the inflation fight.
Key details: Wages advanced 1% in the fourth quarter, but in a good sign, they slowed from 1.3% in the prior period.
The increase in wages in the 12 months ended in December was flat at 5.1%, however.
Benefits rose at a 0.8% pace in the last three months of 2022. The 12-month increase in benefits was unchanged at 4.9%.
The ECI reflects how much companies, governments and nonprofit institutions pay employees in wages and benefits. Wages make up about 70% of employment costs and benefits the rest.
The big picture: Senior Fed officials want to see a tight labor market loosen up and wage growth decelerate further to help ensure inflation returns to pre-pandemic levels of 2% or so.
The central bank on Wednesday is expected to raise a key interest again. It’s likely to keep raising rates — or keep them high for longer — until it sees more signs in the ECI or other wage trackers that labor costs are coming down.
The increase in consumer prices slowed to 6.5% at the end of 2022 from a 40-year high of 9.1% last summer, but it’s still more than triple the Fed’s inflation goal.
Looking ahead: “This result is a decent outcome for the Fed, as labor costs appear to be decelerating, but it would be premature to declare victory,” said chief economist Stephen Stanley of Amherst Pierpont Securities. “With the unemployment rate at a 50-year-plus low of 3.5%, it would be exceedingly optimistic to conclude that wage pressures have rolled over.”
“Wage growth is slowing gradually,” said senior U.S. economist Andrew Hunter of Capital Economics said in a note to clients. “The Fed is still likely to keep raising interest rates at the next couple of meetings, but we expect a further slowdown in wage growth over the coming months to convince officials to pause the tightening cycle after the March meeting.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open higher in Tuesday trades. Stocks fell on Monday.
The numbers: U.S. consumer sentiment improved in late January to 64.9, according to the University of Michigan’s gauge of consumer attitudes.
This added 5.2 index points from 59.7 in December and was up from the initial January reading of 64.6.
Economists surveyed by The Wall Street Journal had forecast an unchanged reading of 64.6.
Key details: A gauge of consumer’s views of current conditions rose to a final reading of 68.4 in January from 59.4 in the prior month.
The indicator of expectations for the next six months rose to 62.7 from 59.9 in December.
Americans viewed that inflation was moderating in January. They expected the inflation rate in the next year to average about 3.9%, down from 4.4% in December. This is the lowest level since April 2021.
In the longer run, inflation expectations held steady at 2.9%.
Big picture: Consumer confidence rose for the second straight month on lower energy prices and better financial market conditions. Assessments of personal finances are improving, supported by higher income and easing price pressures.
But sentiment remains well below the pre-pandemic level of 101 hit in February 2020 and the more recent high of 88.3 hit in April 2021.
Market reaction: Stocks
DJIA,
SPX,
opened higher on Friday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose to 3.54%.
The numbers: The cost of U.S. goods and services rose a scant 0.1% in December in yet another sign inflation is cooling off, opening the door for the Federal Reserve to stop raising interest rates soon.
The rate of inflation, using the Fed’s preferred PCE index, has tapered off rapidly since last summer. Falling oil prices have played a big role, but inflation more broadly is easing.
The annual increase in prices slowed to 5% in December from 5.5% in the prior month and a 40-year high of 7% last summer, according to fresh government data.
That’s the smallest increase in 15 months, though still well above pre-pandemic levels of less than 2% annual inflation.
Key details: The more closely followed core index rose a modest 0.3% last month, matching Wall Street’s forecast.
The increase in the core rate of inflation in the past 12 months decelerated to 4.4% from 4.7%. That’s also the lowest level in 14 months.
The PCE index is viewed by the Fed as the best predictor of future inflation trends, especially the core gauge that strips out volatile food and energy costs.
Unlike it’s better-known cousin, the consumer price index, the PCE gauge takes into account how consumers change their buying habits due to rising prices.
They might substitute cheaper goods such as chicken thighs for more expensive ones like boneless breasts to keep costs down, or buy generic medicines instead of brand names.
The CPI showed inflation rising at a 6.5% yearly rate in December, but it’s also slowed sharply since the summer.
Big picture: The Fed is trying to restore inflation to pre-pandemic levels of 2% or so, and it will keep raising interest rates until it is convinced the genie is back in the bottle. Higher rates reduce inflation by slowing the economy.
Yet with inflation subsiding, Wall Street is raising questions about whether the Fed’s work is almost done. If rates go too high, the economy could sink into recession.
Indeed, many economists think a downturn is likely this year. The central bank has jacked up a key U.S. interest rate to a 15-year high of 4.5% from near zero less than a year ago — and the effects of higher borrowing costs are just starting to bite.
Looking ahead: “With higher interest rates evidently weighing heavily on demand now, we expect core inflation to continue moderating,” said chief North American economist Paul Ashworth of Capital Economics in a note to clients. That “will eventually persuade the Fed to begin cutting interest rates late this year.”
Market reaction: The Dow Jones Industrial Average
DJIA,
and S&P 500
SPX,
were set to open slightly lower in Friday trades.
Gold’s Awakening May Make Investors Sleep Less Soundly
Pour one out for the beleaguered economists, who for once got an important indicator, the consumer price index, right on the nose, after CPI fell 0.1% in December, while core prices rose 0.3%.
“The 2021 surge in durable goods demand normalized, and the resulting collapse in durable goods price inflation was stunningly fast,” says Paul Donovan, chief economist of UBS Global Wealth Management.
“The commodity wave of inflation is fading, and that leaves the profit margin expansion in focus,” he adds. What a good time for earnings season to be upon us, and what do you know, it is, kicking off with the banking sector on Friday before broadening out next week.
Strategists at Goldman Sachs have a new note out, saying that the market is pricing in a soft landing even though the trend of earnings revisions points to a hard landing.
They’re not that optimistic — even in the soft-landing scenario, the team led by David Kostin say the S&P 500
SPX,
will end the year right around current levels, at 4,000. But they identify 46 stocks that could benefit — profitable, cyclical companies that are trading at price-to-earnings valuations below their 10-year median, among other factors.
One name jumps out: Tesla
TSLA,
which trades at 22 times forward earnings versus the 10-year median of 117 times. But the other 45 names are less flashy, ranging from Capital One
COF,
and Carlyle Group
CG,
to a host of industrials including 3M
MMM,
Parker-Hannifan
PH,
and Otis Worldwide
OTIS,
As a whole, these typically $10 billion companies are trading at 12 times earnings, versus 17 times usually.
In the hard landing scenario, S&P 500 profit margins would shrink by 125 basis points, to 10.9% — about in line with the median peak-to-trough decline during the eight recessions since 1970, which has been 132 basis points. Consensus expectations are for a 26 basis-point margin decline.
The Goldman team also have a 36 stock screen for a hard landing — profitable companies in defensive industries with a positive dividend yield. They’re typically food, beverage and tobacco companies as well as software and services companies — including Costco Wholesale
COST,
Kroger
KR,
Altria
MO,
Tyson Foods
TSN,
Microsoft
MSFT,
MasterCard
MA,
and Visa
V,
As a whole, these $37 billion companies are trading at 22 times earnings vs. a historical 24 times.
After a 2.3% advance for the S&P 500
SPX,
over the last three sessions, U.S. stock futures
ES00,
NQ00,
declined on Friday.
The yield on the Japanese 10-year bond
TMBMKJP-10Y,
exceeded 0.5%, the Bank of Japan’s yield cap, ahead of next week’s rate decision , prompting a second day of aggressive bond purchases from the central bank.
For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.
Fourth-quarter earnings were rolling out from Bank of America
BAC,
JPMorgan Chase
JPM,
Citigroup
C,
and Wells Fargo
WFC,
and outside of banks, Delta Air Lines
DAL,
BlackRock
BLK,
and UnitedHealth
UNH,
JPMorgan shares slumped after forecast-beating earnings, though investment bank revenue came in light of estimates. Delta shares also declined after topping earnings estimates.
Tesla
TSLA,
cut prices of Model 3 and Model Y vehicles in the U.S. and elsewhere by up to 20%. The electric vehicle maker stock dropped 6%.
Virgin Galactic
SPCE,
surged after saying it’s on track to launch space-tourism flights in the second quarter.
Apple
AAPL,
says CEO Tim Cook requested, and received, a pay cut after investor criticism.
The University of Michigan’s consumer-sentiment index is due at 10 a.m. Eastern, and Minneapolis Fed President Neel Kashkari and Philadelphia Fed President Patrick Harker are due to speak.
Tyler Winklevoss said charges by the Securities and Exchange Commission brought about Gemini Trust for allegedly offering unregistered securities were “super lame” as it seeks to unfreeze $900 million in investor assets.
There’s a bull market in swearing on corporate earnings calls.
The West is now preparing to send tanks to Ukraine in what could be another escalation of its conflict with Russia, which on Friday claimed victory in the eastern town of Soledar.
A look back at photos of Lisa Marie Presley, who died at age 54.
Here were the most active stock-market tickers as of 6 a.m. Eastern.
| Ticker | Security name |
|
BBBY, |
Bed Bath & Beyond |
|
TSLA, |
Tesla |
|
GME, |
GameStop |
|
AMC, |
AMC Entertainment |
|
MULN, |
Mullen Automotive |
|
NIO, |
Nio |
|
APE, |
AMC Entertainment preferreds |
|
AAPL, |
Apple |
|
SPCE, |
Virgin Galactic |
|
AMZN, |
Amazon.com |
Like a scene out of “Stranger Things” — there’s uproar after new restrictions on the Hasbro
HAS,
game Dungeons & Dragons.
Starting next month, Starbucks
SBUX,
rewards will be less generous for most items, though iced coffee will be easier to get.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton.
General inflation is easing, but the prices of some food items are not going down anytime soon. And the reasons are largely out of the Federal Reserve’s control.
The consumer price index cooled in December, falling to an annualized 6.5% from the 7.1% annual rate recorded in November, according to government data. Still, the annualized inflation rate in food was 10.4% in December, significantly higher than the overall inflation rate even as it represented a slower rate of increase than November, when food prices were 12% higher than in November 2021.
Inflation running at nearly 40-year highs over the past year has put a squeeze on American wallets. Through a series of jumbo rate hikes, the Federal Reserve has sought to tamp down inflation. Its target interest rate was lifted from a negligible level to a range of 4.25% to 4.50% by the end of 2022.
But a few factors impacting food prices are not going away. War is still ongoing in Ukraine, which affected the prices of fertilizers and animal feeds; the avian flu continues to impact the egg supply; and extreme weather conditions are adding complexities to food production.
The following is a look at how a few popular food items are affected.
The price of eggs surged 59.9% on the year in December, up from 49% in November, according to the most government data. That means a carton of Grade A large eggs on average more than doubled in cost with prices reaching $4.25 in December 2022, compared to $1.79 a year earlier. In some parts of the country, consumers could pay up to $8 for a carton of organic eggs.
Avian flu, which has forced millions of chickens to be culled and caused a shortage of eggs, is the main reason behind the price increase. In a change from previous breakouts that faded as summer ended, this time the avian flu lingered into winter.
The holiday season is usually the peak for consumer egg demand, which means that we could see egg prices tick down a little in the new year, experts said.
But it will not be a significant drop given the ongoing flu and high cost of feed. If input costs continue to increase and the bird flu continues to kill large quantities of hens, the costs will most likely be passed on to consumers, said Curt Covington, senior director of partner relations at AgAmerica Lending, a financial services company providing agriculture loans.
Experts, including the biggest egg producer in the country, Cal-Maine, said the avian flu will be hitting egg supplies for the long term. “More than 43 million of the 58 million birds slaughtered over the past year to control the virus have been egg-laying chickens, including some farms with more than a million birds apiece in major egg-producing states like Iowa,” the Associated Press reported this week.
Read more: Cal-Maine says avian flu could continue to hit egg supplies after this year
“I suspect it will take much additional effort to ‘stamp-out’ HPAI this time around and we may very well be dealing with the reality that this will be a year-round issue,” said Brian Earnest, lead economist for animal protein at CoBank, a national cooperative bank serving industries across rural America, in an email to MarketWatch.
The weekly supplies of eggs on hand has also reached a historic low, he told MarketWatch. For the week ended Dec. 19, cases on hand reported by the USDA totaled 1.176 million. That’s a 20% drop year-over-year, and the lowest level for the same week since 2014, he said.
Also see: Why egg prices are sizzling — up 38% on last year
Butter prices rose by 31.4% on the year in December, up from 27% in November, making the average price for a pound of butter $4.81 nationally. It was $3.47 a year earlier.
Extreme heat and smaller cow herds are the main reasons behind that, experts told MarketWatch. Cows eat less and produce less milk in the heat, and the cost of maintaining milk production skyrocketed last year, making farmers unwilling to expand their herds.
Going forward into 2023, the price of butter could soften, but year-over-year price increases could still stay high, said Tanner Ehmke, lead economist of dairy and specialty crops at CoBank.
Cows are approaching their prime milk-producing season, which usually runs from March through May, although customer demand usually peaks during the recently completed holiday season, he said.
But the increase of supply will not be much, Ehmke said, because costs are staying at record highs for farmers to maintain and expand their herds. Drought in the Western part of the country and the war in Ukraine continue to impact the supply and costs of feed.
“It’s [going to be] a very modest increase,” said Ehmke.
About 58% of the U.S. is at least “abnormally dry,” according to the National Integrated Drought Information System. It’s likely this year will see more drought-inducing La Niña weather conditions, according to National Weather Service’s Climate Prediction Center.
“If so, the third dry year in a row would signal the worst drought since at least 2011- 2013,” said Rob Fox, director of CoBank’s knowledge-exchange division in a 2023 preview released in December. “But this time it is more concentrated in the Western states, and it would be even more devastating to their already precarious water supplies and desiccated pastures,” he added.
At the same time, butter production is competing with the growing production of and appetite for cheese in the U.S., Ehmke told MarketWatch last September. U.S. cheese consumption per capita is growing around 1% to 2% each year, according to the USDA. U.S. cheese exports also increased, particularly to countries like South Korea and Japan.
Read more: Butter prices hit an all-time high — partly because extreme heat is taking a toll on dairy cows
Margarine, which is largely made of vegetable oil, is also seeing a huge price increase. The price of margarine, the substitute for butter in the old days, rose by 43.8 % in December, down slightly from 47.4% in November compared to a year before.
While soybeans, corn and sunflower oil are among the food items that have been hugely impacted by the war in Ukraine, another dynamic is at play here, analysts suggested: A large quantity of vegetable oil is being used for the production of renewable diesel.
In 2021/2022, 38.4% of soybean-oil supplies were used for biofuel production — biofuel is a broader category than renewable diesel — up from 35.6% the year before, according to USDA data updated in October 2022.
Transitioning to a green economy laid out in the Inflation Reduction Act will require more soybean supply. The expected growth in soybean oil-based renewable diesel will require considerably more soybean bushels for domestic production, wrote Kenneth Scott Zuckerberg, CoBank’s lead economist for grain and farm supply, in a report in September.
At the moment, global grain and oilseed supplies are tight, and the combined global stocks of corn, wheat and soybeans are forecast to decline for the fifth straight year in 2023, according to the CoBank report.
A mild stock market rally to kick off the new year will be put to the test Thursday when investors face a highly-awaited U.S. inflation reading which could well help determine the size of the Federal Reserve’s next interest-rate increase.
The December CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 6.5% rise from a year earlier, slowing from a 7.1% year-over-year rise seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 0.3% from November, or 5.7% year over year.
See also: Inflation is slowing, CPI to show. But is it slowing fast enough for the Fed?
The December CPI will be particularly important for influencing the Fed’s decision in its upcoming meeting which concludes February 1, said economists at Pimco. They expect the inflation and labor market data will have moderated sufficiently will push the central bank to pause rate hikes before their May meeting.
“After hiking 50 basis points at the December meeting, we expect the Fed moves to a 25bp hiking pace in early February, and ultimately pause around 5%,” wrote Pimco’s economists Tiffany Wilding and Allison Boxer, in a Tuesday note.
However, since the Fed’s December meeting, officials have relentlessly signaled the central bank will need to raise interest rates above 5% in order to get inflation to the 2% target, with no interest rate cuts expected this year. Fed funds futures traders now see a 78% likelihood of a 25 basis point hike at its February meeting, and a 68% chance of another in March, which would bring the terminal rate to merely 4.75-5% by mid-year, according to the CME FedWatch tool.
MarketWatch Live: U.S. stocks book more gains a day ahead of inflation report
After two lower-than-expected CPI readings, which have given the market hope that inflation will melt away quickly, the December reading for inflation is essential to keep alive the market’s hopes for falling inflation, Michael J. Kramer, founder of Mott Capital Management said in a Monday note.
“Inflation swaps currently see inflation falling below 2.5% by the summer of 2023, which seems hopeful,” Kramer said. “This week’s CPI reading will be essential in maintaining that view and could prove disastrous if CPI comes in hotter than expected, veering market-based inflation expectations off course.”
The stock market is looking for an “around 5%” increase in December’s core inflation, said Rhys Williams, chief strategist at Spouting Rock Asset Management. “If you get a number in the low four [percent], the stock-market rally will continue. The market is very hyper-focused on data points.”
U.S. stocks had a positive start to 2023 with hopes that cooling inflation and a potential recession may persuade the central bank to ease off the pace at which it is raising its policy interest rate.
Williams thinks inflation is coming down but it will not hit the central bank’s 2% mark by summer 2023.
“I think at some point the markets will realize, ‘oh we can’t get to 2%,” and then the markets probably do sell off on that. I think maybe in short term [the stocks go] up and then in the second quarter, they go back down as people realize that 2% is not realistic,” Williams told MarketWatch via phone.
U.S. stock indexes ended higher on Wednesday. The S&P 500
SPX,
was up 1.3%, while the Dow Jones Industrial Average
DJIA,
gained 0.8% and the Nasdaq Composite
COMP,
advanced 1.8%.