On Thursday and Friday, data was published in the US that is of great importance for the conduct of the markets later this week and towards the end of the civil year. This is mainly the price index of household expenditures excluding food and energy (core PCE), which the Federal Bank uses to examine the inflation relevant to it and publishes the forecasts for it.
The annual rate of change of the index decreased from 5% to 4.7% and indicated a continued decrease in price pressures within the United States. The rate of change including food and energy also decreased from 6.1% to 5.5%. This is the sixth consecutive decrease almost since the increase of the index reached a peak of 7%. The two numbers did agree with the early estimates, but their consistent decline is important and worthy of note.
Separately, the University of Michigan’s consumer confidence survey for the month of December shows that the household public also believes that inflation will decrease – and quite quickly. They predicted in the survey that inflation in the next 12 months would be “only” 4.4%, compared to an expectation of 4.6% in the initial survey and 4.9% in the previous month. This is their lowest estimate since June 2021.
It is important to remember that all the numbers, as impressive as they are, are still far from both the Fed’s forecast for next year and the 2% inflation target, but they are getting closer there and are steadily offsetting the mid-year inflationary spike. Meanwhile, there are signs of moderation in private consumption – which the Federal Bank is waiting for. Thus, private consumption grew by only 0.1% in the last month, ⅓ of the growth rate of the previous month and half of what was expected. Also, income increased by 0.4% during this period, so the share of consumption out of income decreased in favor of savings, which well reflects the effect of interest. The business sector also reported a moderation of activity in that orders for durable goods from factories fell 2.6% in the last month, against expectations for a drop of only 0.6% and after a 0.7% increase in the previous month.
All these data published at the end of the week mainly point to a slowdown in inflation and the expectations for it towards the beginning of 2023, while moderating business and especially consumer activity, a combination that the Federal Bank wants to see as stated.
Looking ahead to 2023, however, there are no signs that this moderation will turn into an actual recession. Thus, an updated figure was published on Thursday on the growth of GDP in the US in the third quarter, which surprised and was higher than the initial figure. Growth was recorded at an annual rate of 3.2% compared to the second quarter and this is a recovery from a decrease of 0.6% in the previous quarter. It was expected that the rate would remain at 2.9% compared to In the third quarter of last year, the GDP recorded an increase of 1.9%, compared to an increase of 1.8% in the second quarter. The publication also shows that the inflation rate of the product prices was cut from 9% in the second quarter to 4.4%.
A combination of a decrease in the inflation environment (actual + expectations) and data on economic moderation, but without entering a recession, will strengthen the chance of a soft landing scenario in the US. As a result, it is possible that in the end the interest rate increase in the US will end sooner and perhaps even at a slightly lower rate Lower than the Fed expects today.
We note that the interest rate currently stands at 4.5% and the Fed recently expected that it would stand at 5 to ¼5 percent at the end of the process, but some of its members thought that the interest rate would eventually be higher. Admittedly, the Fed will not rush to lower interest rates, because of the distance that still exists between actual inflation and the inflation target. However, from the point of view of the market, which first of all wants to see the interest rate hikes behind it, the set of data published towards the end of the year constitutes good news overall.
***The writer is chief market economist of Bank Mizrahi Tefahot***