About a week and a half ago, the Consumer Price Index (CPI) was published in the US, which was higher than expected – 6.4% compared to the forecasts for 6.2%. In the past year, higher than expected inflation figures would have sent the indices down, but that day the market actually went up and it would be seen Because the investors were not ready to see which particular figure spoils the gains and optimism of the opening of 2023. On the other hand, the reason could be that the gap between the expectation and the actual figure was not large enough, especially when the core index was only 0.1% above expectations. Despite it Optimism, it seems that the higher-than-expected inflation was not accidental and only now is the market addressing this.
The PCE index (Personal Consumption Expenditure) is another index that can be used to measure inflation in the US and it is the index preferred by the members of the Fed – meaning they will rely on its data more than the consumer price index in everything that concerns their decisions. Today the index for the month of January was published and it is indeed pointed out that inflation is indeed not moderating at the rate the market expects – the index rose in the last twelve months by 5.4% when analysts expected it to be 5%. The core index also rose above expectations with 4.7% in an annualized view compared to the expected 4.3%, On a monthly basis, the index rose by 0.6%, the highest increase since the summer.
The high index signals to the market that the Fed’s work in trying to lower inflation is still far from over and that further interest rate hikes are still ahead, even if it is at a slower pace than a few months ago. The market is now pricing in that the interest rate will peak at 5.45% and the expectation is that this will happen this coming July, the market is also pricing in a 36% chance of a 0.5% interest rate hike at the Fed’s next meeting. Accordingly, the Nasdaq is losing more than 2% today and the S&P 500 is down about 1.4%.
In terms of bond yields, it seems that the downward trend from last November to the beginning of the month has stopped and increases are again the direction – the yield on the two-year bond is over 4.8%, the highest point since 2007, when it peaked at 5.3%. The yield on the 10-year bond stands at 3.96% and is approaching the most recent peak recorded in November of 4.25%. The gap between the two yields is growing and indicates a greater concern of the market regarding an impending recession.
In addition to the official inflation data, private consumption data in the US was also published today. According to the data, consumption increased in January by 1.8%, The highest increase since March 2021when in the previous month the figure was a decrease of 0.1%, the expectation for the month was 1.3%.
The members of the Fed will meet next month to decide how much the interest rate will rise in the US and the latest data will not make it too difficult for them. According to the minutes of the Fed from the last meeting, it is clear that the message we have been hearing for months has not stopped – the Fed prefers to continue to fight inflation, even If it increases with a slowdown in the economy, the bank’s inflation target remains at 2% and one of the biggest concerns is that the strong labor market will not allow prices to drop to such a level, mainly due to the fact that wages only continue to climb as well.
Jerome Powell, like the other members of the central bank, emphasized the same thing about the fight against inflation a lot and he is apparently looking at past cases in which the central bank “took its foot off the gas” too early in an attempt to lower inflation, which led it to rise sharply up and actually increase the economic suffering required to restore the situation to its original state. The most significant example is from the early 1980s, when the governor of the central bank at the time, Paul Volcker, was required to raise the interest rate to almost 20% in order to suppress the inflation that aspired to 15%.
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