The Fed’s closely watched core rate of inflation fell further in November, although it was less than expected. However, Fed Chairman Jerome Powell recently focused on the “most important” new inflation rate to prove continued rate hikes: personal consumption expenditures services are lower than housing, which fell to 4.3% last month. The S&P 500 opened lower after the PCE report.
The personal consumption expenditures price index increased by 0.1% during the month. PCE inflation continued to decline from a 40-year high in June of 7%, easing to 5.5%. Core prices, excluding food and energy, rose 0.2% month-over-month with annualized core inflation declining to 4.7%.
Wall Street expected an increase of 0.2% in the PCE price index and 0.2%, with an overall inflation rate of 5.5% and a 4.6% core rate.
Powell shifts targets with new headline inflation rate
Powell’s new favorite inflation rate also happens to be the most problematic for the S&P 500. The measure factors in commodity inflation, which is declining rapidly. It also excludes housing inflation, which appears set to decline in 2023 as government data catches up with stalled growth in market rents.
That leaves only essential services other than housing, such as health care, education, hospitality, and haircuts. Because changes in the prices of such services correlate so closely with wage growth, Powell said, they provide the best indication of where core inflation is headed.
The focus on this statistic is so new that it is not made available in the Commerce Department report or Wall Street estimates thread. IBD calculations show that the personal consumption expenditures services price index minus housing and energy rose 0.3% in the month and 4.3% from a year ago, down from October’s upwardly adjusted annual increase of 4.7%.
The shocking monthly inflation reading for personal consumption expenditures services minus housing and energy came in as prices for transportation services fell 2.1% from October, but remained 11.8% higher than year-ago levels. Health care inflation eased to a monthly gain of 0.2%.
The Fed’s new headline inflation rate is not good for the S&P 500 because it focuses on the strongest part of the economy: the very tight labor market. Until the job market breaks, wage growth is likely to remain stubbornly high, and the Federal Reserve may raise the benchmark interest rate higher and for longer than markets expect.
Standard & Poor’s 500, Treasury yields react to the PCE inflation rate
After the personal consumption expenditures inflation report, the S&P 500 fell 0.5% early Friday in stock market action. The Dow Jones Industrial Average lost 0.5%, while the Nasdaq Composite fell 0.9%.
The S&P 500 and broader market have been under pressure since the Fed’s half-point hike in interest rates and expectations for further tightening to a 5%-5.25% range in 2023. Concerns about the earnings outlook and China’s Covid blowout add to concerns about Fed overextending tighten. However, the bond market didn’t seem to be buying the Fed’s guidance. As of Friday morning, the markets were pricing at a peak rate of 4.75%-5%.
During Thursday’s close, the S&P 500 fell 20.3% from its record closing high on Jan. 4. While the S&P 500 remained 6.9% above its 52-week closing low, the index fell again below the 50-day and 200-day highs. Moving averages.
The 10-year Treasury yield rose 6 basis points, to 3.75%.
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