Inflation Data Disappoints; Financial Markets See Red on Tuesday
The U.S. Bureau of labor statistics released monthly and yearly inflation data on Tuesday. Month over month core inflation data came in hotter than expected at 0.4% in January which was above and beyond the prior month's 0.3%. Sharp increases in the costs of shelter and transportation drove the headline number higher. Yearly core consumer price inflation remained steady at 3.9% which was a disappointment to market participants expecting a 3.7% reading. Over the prior year, costs for motor vehicle insurance (+20.6%), personal care (+5.3%), and recreation (+2.8%) were notable.
Month over month United States inflation rate increased by 0.3% in January, the hottest reading since November 2023. Despite a decline in the cost of gasoline, increases in the prices for food and shelter were major drivers. Annual United States Inflation did drop back to 3.1% in January 2024, an improvement over the December reading of 3.4%. Despite the cooler headline number, market participants were still disappointed given expectations for a 2.9% reading.
Prices for goods continue to moderate as pandemic era supply chain problems are worked out. Services prices however remain persistently sticky. Until a disinflationary trend emerges in services, traders will continue to worry about a hot labor market driving elevated prices for services. It is well understood the Fed will be motivated to keep rates persistently high until the labor market and services sector begin to cool. Furthermore, there are no guarantees the current overall disinflationary trend will be persistently downward each month. It was not long ago that Fed officials were speaking about keeping rates 'higher for longer'. Market participants would do well to recognize that interest rate cuts are not mandatory, and it is / was probably presumptuous to expect six or seven rate cuts in 2024. This week's data reminds us the job of taming inflation is difficult at any time. Yet within this particular time, the added inflationary forces of supply chain disruption secondary to Red Sea turmoil, a stubbornly robust labor market, and a persistent services sector further complicate the path toward 2% inflation.
United States market participants had spent the prior three months driving up equity prices in anticipation of interest rate cuts coming early in 2024. The Tuesday inflation data took air out of that balloon. The expected timing of a first interest rate cut has now moved from May to June. The S&P 500 index closed down 1.37% on Tuesday. Closing prices were right at short term support in force over the prior 3 month period.
Retail Sales MoM
U.S. retail sales declined in January by 0.8%, which was a surprise given estimates only forecasted a 0.1% fall. A decline after the holiday shopping season was expected, but the magnitude of such a decline came as a surprise.
Initial Jobless Claims
Thursday registered a new initial jobless claims number which came in at 212,000. That entry makes the second consecutive month of declines in initial claims. Here is further data the labor market continues to be hot; it is more evidence that supports a higher for longer interest rate policy.
Preliminary Building Permits
A U.S. Census Bureau report on Friday morning showed building permits dropped to a seasonally adjusted annual rate of 1.47 million units, a decrease from the December reading. Single-family dwelling permits did rise by 1.6%, but the multi-family dwelling permit number dove by 7.9%.
PPI MoM
A report from the U.S. Bureau of Labor Statistics on Friday indicated that producer prices have risen the most in five months. Producer prices rose 0.3% in January; consensus was for a 0.1% rise. Goods prices did decline 0.2%, but costs of services came in at +0.6% which drove the headline number higher. This report is further evidence that inflation is not yet handled, and it will give the Fed pause with respect to interest rate cuts.
Preliminary Michigan Consumer Sentiment
This popular gauge of consumer sentiment edged slightly higher to 79.6 versus the prior month's 79.0. An important factor in the report is that of inflation expectations which did edge higher to an expected 3% inflation for the upcoming year compared to a prior 2.9%.
S&P 500 price action this week did break a 5 week winning streak. The short term support trendline did remain in force and is probably still valid; Tuesday's sharp downturn only violated the line by 0.75%. That much of a trendline break is not a strong break of support. We will have to watch next week's price action closely as it is critical for future market direction.
The information provided in this blog post is for general informational purposes only and is not intended to be a personalized investment advice. The views expressed herein are the author's own and do not necessarily reflect the views of any financial institution or advisory firm. The content of this blog post is not intended to be a substitute for professional financial advice. Always seek the advice of a qualified financial advisor with any questions you may have regarding your investment strategy. The author of this blog post will not be liable for any errors or omissions in this information nor for the availability of this information. The author will not be liable for any losses, injuries, or damages from the display or use of this information.
Comments