The stock market pulled back earlier this week after an inflation reading that came in hotter than expected. Year-over-year inflation (CPI) dropped from 3.4% to 3.1%, which is positive, but the markets were expecting 2.9%. In a “Not so fast” moment, the Federal Reserve will likely not be able to cut interest rates as quickly as the market is anticipating. Here’s a few additional considerations when we look at the economy.
One of the biggest increases in inflation was a +6.0% in shelter costs over the last year, which accounts for nearly one third of the CPI. This component is typically a lagged variable and will likely continue to decline throughout 2024 if you compare it to actual housing data, which has continued to decline from a peak of 8.2% in March of 2023. This also says “Not so fast” …
On the unemployment front, in spite of a Fed funds rate of 5.25%, the labor markets are holding strong with unemployment at 3.7%. There are still approximately 1.4 jobs for every unemployed person in the US, so that will likely keep a lid on unemployment in the short run.
Gasoline and diesel prices are continuing to decline from the peak in the summer of 2022. Although there has been a big emphasis on electric vehicles recently, over 70% of transportation costs come from gas or diesel. The drop in energy costs is a positive for consumers and transportation companies alike since everything we consume has an energy component built into the price. This should continue to help push down inflation for individuals and allow companies’ margins to expand.
In spite of the Fed, earnings in Q1 have been positive and the consumer remains strong. Yes, the media reminds us that personal debt is at the highest dollar value ever but if you consider it as a percentage of household disposable income, we are still running under 10% and well below the extremes of 2007-2008. Consumers refinanced to lower rate mortgages during the last few years, so the higher interest rate environment is providing less economic impact than in past Fed tightening cycles.
Finally, we know there will be twists and turns with the upcoming spring primaries and the general election in November. We fully expect volatility through the year but once November 5th has passed, the market will adapt to the certainty. In some ways, it is also saying “Not so fast” in assuming we know what will happen. Hang on tight…it’s going to be a wild ride this year!
Dan
