The core inflation rate most closely watched by the Federal Reserve fell again in November, although somewhat less than expected. Yet Fed Chief Jerome Powell recently pointed to a “most important” new inflation rate to justify continued rate hikes: PCE services minus housing, which slipped to 4 .3% last month. The S&P 500 edged higher, reversing early losses following the personal consumption expenditures report.
The PCE price index (personal consumption expenditure) rose 0.1% on the month. The PCE inflation rate continued to decline from June’s 40-year high of 7%, slipping to 5.5%. Core prices, less food and energy, rose 0.2% during the month, with the annual core inflation rate declining to 4.7%.
Wall Street expected the PCE price index to rise 0.2% and 0.2%, with an headline inflation rate of 5.5% and a base rate of 4.6%.
Powell changes goalposts with new key inflation rate
Powell’s new preferred inflation rate happens to be the most problematic for the S&P 500. The gauge factors in rapidly falling commodity inflation. It also excludes housing inflation, which looks set to decline in 2023 as government data catches up with stagnant growth in market rents.
This leaves only basic services other than housing, such as healthcare, education, hospitality and haircuts. Since changes in the prices of these services are closely linked to wage growth, they provide the best signal of the direction underlying inflation is heading, Powell said.
The emphasis on this statistic is so new that it is not provided in the Commerce Department report or a topic of Wall Street estimates. IBD calculations show the PCE services price index less housing and energy rose 0.3% on the month and 4.3% from a year ago, down compared to October’s upwardly revised 4.7% annual increase.
The softer monthly inflation reading for PCE services less housing and energy came as prices for transportation services fell 2.1% from October, but remained 11.8% in above the levels of the previous year. Inflation for health care services fell to a monthly gain of 0.2%.
The Fed’s new key inflation rate is not good for the S&P 500 because it emphasizes the strongest part of the economy: the ultra-tight labor market. Until the labor market cracks, wage growth should remain stubbornly high and the Fed could raise its benchmark interest rate higher and for longer than markets expect.
S&P 500, Treasury yields react to PCE inflation rate
After the PCE inflation report, the S&P 500 edged up 0.%2 on Friday morning Action on the stock exchange. The Dow Jones industrial average rose 0.2%, while the Nasdaq composite lost 0.2%.
The S&P 500 and the broader market have come under pressure from the Fed’s half-point rate hike and projections of further tightening in the 5% to 5.25% range in 2023. regarding the earnings outlook and the Covid explosion in China add to concerns about excessive Fed tightening. Yet the bond market does not seem to accept the Fed’s forecast. On Friday morning, the markets were expecting a peak rate of 4.75% to 5%.
Through Thursday’s close, the S&P 500 is down 20.3% from its Jan. 4 closing high. While the S&P 500 remains 6.9% above its 52-week closing low, the index has fallen back below its 50-day and 200-day lows. moving averages.
The 10-year Treasury yield rose 6 basis points to 3.75%.
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