Stock futures indicate a negative opening today. This morning, the Bureau of Economic Analysis released its Personal Consumption Expenditures (PCE) Price Index figures for the month of November. On a month-to-month basis, the index showed 0.1% inflation, versus a reading of 0.3% in October. Year over year, the PCE increased 5.5%, compared to the previous month’s rate of 6.0%. Core PCE, which excludes volatile food and energy prices, was up 0.2% from October and 4.7% from one year ago. Pricing pressures, though still elevated, continue to slowly abate. This is further evidence that the Federal Reserve’s inflation-fighting strategy is working.
Investors are also parsing additional just-released data. Real disposable income and consumer spending (after inflation) advanced 0.4% and 0.1% last month. Wage growth, especially on the services side of the economy, remains solid, in turn supporting consumer purchases. That said, consumers are shifting spending from goods toward services, while closely watching their budgets, given high inflation and the possibility of a recession in 2023. We note that monthly durable goods orders declined 2.1% in November. The manufacturing sector has softened, as consumers have become more frugal and companies are working through inventories built up when supply chains were less dependable.
Later this morning, the University of Michigan will provide its latest reading on consumer sentiment, which will probably come in at a modest level (i.e., below 60). The university will also report the results of its December survey of consumer inflation expectations five years out; a figure near 3.0% seems likely. New home sales data for the month of November will also be announced. We expect this data point to indicate a further weakening of the housing market, considering elevated mortgage rates.
It looks as if the major domestic stock market indexes are headed for another week of losses. This December is proving to be a challenging month for the markets, leaving stocks well in the red in 2022. The blue-chip Dow Jones Industrial Average is helping investors to preserve their capital better than the broader Standard & Poor’s 500 and the tech-weighted NASDAQ. Individual investors, generally reluctant to sell their shares and lock in losses, have underpinned the indexes. Conversely, institutional investors have pared market exposure to avoid any additional near-term bloodletting.
The Federal Reserve appears committed to bringing the overall annual rate of inflation down to about 2%. A series of short term interest rate hikes, 4.25 percentage points in all, has helped to slow a strong housing market and reduce goods inflation. Lately, services pricing seems to be easing, as well. The central bank is working against the headwind of a still healthy economy, as recently evidenced by solid gross domestic product growth of 3.2% in the third quarter. Wage gains are making it difficult to bring inflation down to the Fed’s goal. A consensus of Fed officials expects rates to rise above the 5% mark by this coming spring.
With the Fed, and other central banks in Europe and Asia, increasing interest rates, many on Wall Street expect a recession to soon take hold. We believe that any potential downturn will be relatively mild. That said, stock prices may remain stressed through the first quarter of next year. Blue-chip equities and high-quality bonds appear the best places to park cash until the Fed has largely achieved its objectives. — David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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