Stock market futures suggest a mixed open today. Early this morning, investors parsed updated Personal Consumption Expenditures (PCE) data for the month of December from the U.S. Bureau of Economic Analysis. The headline PCE price index showed a further easing in the inflation expansion rate. Year on year, this index showed a 5.0% increase, versus 5.5% in the previous month. Core PCE, excluding volatile food and energy prices, was up 4.4%, year to year, down from the 4.7% advance in November. The core PCE is the Federal Reserve’s preferred inflation gauge, when it is considering rate policy. Also, prior to today’s trading, the bureau released December data on real disposable income, which rose 2.5%, below the November rate of 2.7%, and real consumer spending, falling 3.4%, greater than the prior-month contraction of 2.4%.
Shortly, the University of Michigan will provide its latest readings on consumer sentiment and one- and five-year inflation expectations. Consumer sentiment likely remained at a tepid level, near the 64.6 mark reported for December. We would not be surprised to see inflation expectations little changed from the previous growth-rate figures of 4.0% and 3.0% for one year and five years, respectively. This data ought to have an incremental impact on share prices, on top of that of the PCE index.
It looks as if the major domestic stock market indexes will extend their advances, thus far, for 2023. At the start of Wednesday’s trading, the indexes gave up gains posted earlier this week, given disappointing quarterly earnings reports from software developer Microsoft (MSFT), defense contractor Boeing (BA), and medical products supplier Abbott Laboratories (ABT), as well as a cautious business outlook issued by diversified company 3M (MMM). A decent December-period operating performance from telecom AT&T (T), on strength in wireless services demand, however, helped to improve investor sentiment as the day progressed. That, along with rising optimism that inflation is slowing, allowed the markets to recover from Wednesday’s early losses.
Market momentum firmed on Thursday, even in the face of soft jobless claims (for the week ended January 21st), solid (albeit slower) fourth-quarter 2022 gross domestic product growth (2.9%), and a sharp durable goods orders improvement (5.6%). Tempering the relatively positive news were a negative reading of the Chicago Fed’s national activity index and soft new home sales for December. Investors appear to be viewing slackening industrial, manufacturing, and housing sector activity as an indication that the Federal Reserve’s inflation-fighting strategy is working. The new PCE index rates confirm such a view.
The central bank’s Federal Open Market Committee meets from January 31st-Febrauary 1st. Wall Street generally anticipates an increase of one-quarter of a percentage point in short-term interest rates, to the 4.50%-4.75% range. That would be less aggressive than the December hike of one-half of a point. A growing number of investors seem to be hopeful that the Fed is nearing
the end of its current rate-hiking regimen. Some Fed officials suggest rates soon will top out at just above 5%. Chairman Jerome Powell appears intent on holding rates at that level through the end of this year. The stock and bond markets are expressing optimism that rate cuts could occur before year end, a scenario Mr. Powell has pushed back on.
Year to date, NASDAQ technology stocks are up 10%, while the benchmark Standard & Poor’s 500 Index has advanced almost 6%, and the blue-chip Dow Jones Industrial Average has gained 2.4%. There is not yet any clear indication that the Fed has won the inflation fight. Additional data on corporate earnings, the job market, and inflation surely will influence the central bank’s future actions. Share-price volatility could pick up in the weeks and months ahead. For now, we advise diversifying portfolios with meaningful weightings of high-quality growth and value/defensive equities. – David M. Reimer
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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