1. Consumer Inflation data was released by the Bureau of Labor Statistics (BLS) on Thursday. The Consumer Price Index set a mark of 3.4% in December 2023, an increase from the November mark at 3.1%. Although the December CPI data still represents a significant decline from inflation one year ago, the increase from month to month is an unwelcome development given the Fed’s ongoing struggle to bring inflation back to a 2% target. Core CPI did ease to 3.9%, which is an improvement over the previous 4%.
Month over month data set a similar pattern as consumer prices rose by 0.3% in December compared to the preceding month. November showed a 0.1% month over month rise. Core month over month inflation remained steady at 0.3%.
On Thursday, markets closed muted with DIJA at +0.04%, S&P 500 at -0.07%, and NASDAQ at 0%.
The prior year’s decline in inflation is notable because it occurred without a corresponding increase in unemployment, which remained low at 3.7%. This breaks the typical pattern where reduced economic activity and higher unemployment are needed to lower inflation. The report attributes much of the disinflation to improvements in supply chains and increased labor supply. Factors like a decrease in job openings and voluntary quits also played a role.
Furthermore, consumer expectations for inflation have improved; forecasts for the next year are now at the lowest level in three years. This is a crucial indicator as consumer expectations can influence actual inflation trends.
2. Producer inflation data was released by BLS on Friday. The report showed a surprising 0.1% reduction in producer prices when a 0.1% increase had been forecasted. The U.S. PPI has now fallen for three consecutive months.
Goods prices dropped 0.4% in December thanks in large measure to a 12.4% reduction in the cost of diesel fuel. The December drop was the third consecutive monthly decline in the cost of goods in the United States. Services inflation on the other hand is traditionally less sensitive to a policy of interest rate hikes. The January producer inflation report shows services prices unchanged, a significant factor for financial markets. Now that supply chains have normalized after being severely disrupted during the global pandemic, goods prices are declining steadily while services prices remain sticky. Services prices, which are bolstered by a tight labor market, are now the focal point of the Fed’s battle with high inflation.
With CPI and PPI data now in hand, economists estimate core PCE in December rose 0.2% compared to the 0.1% increases seen in October and November. This data leads most economists to believe the Fed will cut rates in 2024; however the market will likely need to wait for a May or June rate cut rather than one in March.
3. In the overnight hours of January 11-12, United States and British military forces attacked roughly 60 targets in Yemen to degrade the Iranian backed Houthi militant group’s ability to threaten international shipping in the Red Sea and the Gulf of Aden. Houthi fighters have been launching indiscriminate attacks on cargo vessels off Yemen’s western and southern shores for weeks in an erratic effort to support Hamas. While initial attacks targeted vessels linked to Israel, most have no obvious connection to the conflict in Gaza.
United States Navy fighter-bombers and British land-based aircraft as well as warship and submarine launched tomahawk cruise missiles were used to carry out the overnight assault. Canadian, Australian, Dutch, and Bahraini assets were in support. The assault targeted launching areas, radar sites, and weapon storage facilities in Yemen which had been used to threaten passing cargo ships. The raids were conducted at night to minimize civilian casualties.
The U.S. lead strikes are the latest development in a new round of Middle Eastern violence this time sparked by a massive October 7, 2023 Hamas attack on Israeli civilians resulting in 1200 deaths. The subsequent Israeli military incursion into Gaza comes at a time when the United States has been trying to ease away from Middle Eastern military and political headaches. Prior to October 7, 2023, the Biden administration had been pushing for diplomatic cooperation between Saudi Arabia and Israel. The new security alignment would have focused on confronting Iran in the wake of a power vacuum left by an inwardly moving United States. For now, that diplomatic effort is on hold. However, the United States would prefer Middle Eastern conflicts be managed by local powers, yet the Iranian backed Houthi attacks are forcing the Biden administration to draw focus from other flashpoints like Ukraine and Taiwan. 2024 is an election year, and the current U.S. administration must feel pressure to ensure global supply chains remain efficiently on schedule in order to keep a lid on energy and other commodity prices not to mention inflation.
4. On Saturday, Taiwanese voters reaffirmed their staunch desire to remain independent from mainland China by voting to keep the Democratic Progressive Party (DPP) in power for another four years. A third consecutive term for the DPP is remarkable in Taiwanese politics and underscores the electorate’s desire for independence from mainland communist party rule. The political victory could serve as a harbinger of a new round of U.S.-China tensions. A spokesman for the Chinese government’s Taiwan Affairs Office stated the election “doesn’t change the general trend that the motherland will eventually be unified.” As Taiwan continues its trend of independence and closer cooperation with the West, communist party leader Xi Jinping may decide military aggression is the only path to his stated goal of reunification. While calm now, the threat of further confrontation between the world’s top two economies is real.
5. Earnings season began this past week with bank stocks posting disappointing earnings that missed expectations. Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo all posted earnings misses. This week brings more reports from large bank and financial services firms. The KBW Bank stock index was lower by 3.1% for the week which compared unfavorably to the positive 4.3% return posted by the Magnificent 7; the force that drove equity markets in 2023 is still very much in the driver’s seat early in 2024.
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