Financial markets are signaling their belief that the Fed can bring down inflation without putting the economy into recession and millions of people out of work – i.e. the “soft landing.” This Tuesday’s release of January CPI inflation data will test that belief.
- Chair Powell’s comments last Tuesday suggested another couple 25 bp rate increases this year, bringing the Fed funds rate to 5.25%. Subsequently, the U.S. stock market pulled back 1.8% to Friday’s close. The pull-back in stock prices was welcome as it gave breathing space for the S&P which is still up 6.5% year-to-date.
- December headline CPI inflation was revised up to 0.3% m/m, and the consensus guess is that January CPI headline inflation will come in at 0.3% as well. More importantly core CPI inflation will likely tick down to 0.3% m/m, which would be positive news for the Fed and equity markets.
- January and February CPI inflation reports will be out before the Fed meets again on March 21-22 which leaves room for the interest rate increases to wring inflation more tightly out of the economy. This, along with economic growth indicators, will determine how much more the Fed may raise rates and whether there is still a chance for it to be dropping interest rates later in the year.
Gauging U.S. economic growth is increasingly difficult, and all relevant indicators are for it to decline in the first half of 2023. That said, continuing job growth and low unemployment may prevent the National Bureau of Economic Research declaring a recession.
- Much like we experienced in the first half of 2022, we likely will see negative GDP growth in the first quarter of 2023 because of burning off the unexpected 2022-Q4 inventory build-up and the U.S. deteriorating trade deficit, but without a big increase in unemployment.
- The Leading Economic Indicators is now down 3.8 percent over the six-month period between June and December 2022, principally because of low consumer confidence, new orders, building permits, the leading credit index. The 10-year / three-month U.S. Treasury rates also are inverted. Both are signals of likely recession.
- The big question is whether this declining economic growth will also bring down inflation enough, as declining demand for goods, services and labor restrains their price increases.
Disclosure: Securities offered through Keel Point Capital, LLC, Member FINRA and SPIC. Brokerage and Investment advisory Services are offered under the Keel Point brand. Investment Advisory services offered by Keel Point, LLC an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.