Inflation was the theme of the week, and in general the markets liked what was reported. The first report was the consumer price index for March. The headline rate was up just +0.1% month-over-month, a tick below expectations, while core prices were up +0.4%.
Energy and food prices pulled down the headline number while housing costs ran hot. The chart below shows the year-over-year so-called Shelter index that goes into the inflation calculation. Rental prices are up more than +8% over the last year.
But there are hints of good news. The month-to-month change came in at +0.5%, below expectations. Furthermore, leading indicators of rents are slowing significantly. For example, rentals listed on Redfin are showing a year-over-year decline. This is likely to feed through into the inflation statistics with a lag.
The outlook for rental prices is important because it makes up about a third of the CPI index.
The other inflation report was the Producer Price Index. This measures the change over time in the selling prices received by domestic producers of goods and services. This index declined in March both at the headline and core level.
In essence both reports are painting a picture of a slowdown in the rate of change of inflation, but progress is slow.
Fed Minutes and What to Expect in May
This week’s inflation numbers received a lot of attention because there’s only one more inflation report on April 28th before we get to the Fed rate decision on May 3rd. Investors are wrestling with the outlook for another rate hike, and nothing this week changed the idea that the Fed probably has another quarter point hike in them.
The Fed did publish the minutes from their last meeting this week. The main takeaways were:
* Policymakers scaled back expectations for interest-rate hikes this year after the banking turmoil; officials stressed need to watch incoming data to see how deeply an anticipated credit crunch would slow the economy.
* Despite that, the March decision to raise rates by 25 basis points was unanimous among all 18 officials.
* This is new – the Fed staff projected a “mild recession” starting later in 2023, followed by a recovery in the subsequent two years.
* Officials judged the worst of the bank turmoil was likely limited to a “small number of banks with poor risk-management practices and that the banking system remained sound and resilient.” Umm, it’s the bank’s fault – the regulators don’t bear any blame??
Despite the comment on a possible recession, the market is placing odds of basically 80% on another quarter point hike on May 3rd.
But after that the market is pricing in rate cuts in the back half of the year. Currently a full point cut is expected by the end of January 2024. This would imply a major slowdown in inflation and probably a modest recession.
But how much faith should we put in market pricing? The chart from Deutsche Bank below makes a good case that the market is terrible at pricing in future rate changes.
As they say, why would the market be right now?
(Other) Charts We Found Interesting
- Office vacancies in San Francisco hit all-time highs.
- Traders are short the S&P 500 by the largest amount since 2011.
- The Economist with a bullish U.S. economy story. Another contra magazine indicator?
- The Medicare trust fund will run out of money by 2031. Social Security will go bust by 2033. Should we expect proactive action to avoid a well telegraphed problem, or crickets until the crisis hits? Yea, I’d pick door number two as well.
- An amazing chart showing infant mortality over time.
- A related chart, but showing the share of individuals surviving to a certain age. What jumps out is a greater share of people living longer, but not longer lived. Obviously we have yet to see a step-function increase in life expectancy.
- Poppy fields at the Antelope Valley Poppy Reserve in Lancaster CA. Flowers blooming in the desert – beautiful!!
Have a good weekend.
Charles Blankley
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