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Unconvincing price moves as the economy cools [Video]

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Inflation data released last week was mixed. There was not the “clear and convincing” evidence of cooling prices that the Federal Reserve was looking for.

The core PCE price index — the Fed’s preferred measure of inflation — rose 4.7% in May from a year ago (chart above), which was cooler than the 4.8% rate economists had expected. This was down from a 4.9% rate in April, a 5.2% rate in March and a peak rate of 5.3% in February.

On a month-over-month basis, the core PCE price index rose 0.3% in May, which was cooler than the 0.4% economists had expected. It was the fourth consecutive month that the metric rose at a rate of 0.3%.

While the metric is generally moving in the right direction, it is high.

“This is not the ‘clear and compelling’ evidence the Fed needs to shift to less aggressive rate hikes,” Michael Pearce, senior U.S. economist at Capital Economics, wrote Thursday.

“Federal Reserve Chairman Jay Powell has emphasized that the Fed wants to cool inflation on a month-to-month and year-to-year basis,” Diane Swank, chief economist at Grant Thornton, wrote Thursday. “The first is the most important and is not happening yet. Core PCE remains more than twice the Fed’s 2% target, which is very hot.

It doesn’t help that consumers remain in the dark on pricing.

According to the Conference Board’s June Consumer Confidence Survey (via @renmacllcConsumer expectations for the 12-month inflation rate were a record 8%.

Cooler prices may be on their way

Inventory levels continue to rise across industries.

This week only, Nike, Bed Bath & Beyond, and Micron Among the big companies flagging high inventory levels.

Ed Yardeni of Yardeni Research has a composite index that includes delivery times and order backlogs — two good proxies for supply chain delays — from five regional Fed bank surveys. The metric fell to the lowest level last seen before anyone mentioned anything about pandemic-related supply chain disruptions.

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“June surveys of five of 12 district Federal Reserve banks strongly suggest that supply-chain disruptions have eased significantly in recent months,” Yardeni wrote.

This confirms other indicators of slackening supply chains. Bank of America’s biweekly trucker survey released July 1 showed: “The truck capacity indicator was 70.9, up from 67.0 in the last survey, as more shippers see available truckload capacity.”

Loosening supply chains is a good sign for lower inflation.

If they reflect improving supply they are a good sign.

But sluggish demand seems to be playing a significant role here.

The preparation cools

According to the S&P Global US Manufacturing PMI report released on Friday, the headline index fell to 52.7 in June. This suggests that manufacturing activity has been growing at a slower pace since July 2020.

Similarly, the ISM Manufacturing PMI fell to 53.0 in June, its lowest level since June 2020.

Both reports saw a significant decline in new orders.

“Forward-looking indicators such as business expectations, new order inflows, work backlogs and purchases of inputs have deteriorated significantly to signal the risk of an industrial slowdown,” wrote Chris Williamson, chief business economist at S&P Global Market Intelligence. Friday

Watch for June durable goods orders report to be released on July 27. According to the May report, orders – including major core capex orders – were still rising.

“Some welcome news is that the decline in input demand has put some pressure on supply chains and calmed prices for a wide variety of commodities, which should help ease broader inflationary pressures in the coming months,” Williamson added.

Remember that bad news about the economy can be good news for inflation. So if reduced manufacturing activity leads to lower prices, this is the bad news the Fed is looking for.

Are customers bursting at the seams?

Consumer spending data is less than stellar.

Personal consumption expenditures (ie, consumer spending) rose 0.2% in May to a new record high from the previous month, according to a BEA report released Thursday.

On the one hand, it is good that consumers continue to spend at a declining rate.

On the other hand, inflation has played a significant role here. Adjusted for inflation, real spending actually fell 0.4%.

And consumers are very aware of inflation.

The Conference Board’s consumer confidence index fell to its lowest level since February 2021 as inflation expectations worsened as the survey’s index of expectations plunged to its lowest level since March 2013.

“Consumers’ tougher outlook was driven by rising concerns about inflation, particularly rising gas and food prices,” Conference Board senior director Lynn Franco said Tuesday. “Expectations have now fallen below the 80s reading, indicating weaker growth in the second half of 2022 and raising the risk of a recession later in the year.”

While consumer sentiment is turning sour, actual consumer spending behavior may not reflect an economic downturn. This is a bullish contradiction that has been playing out for months. Bank of America recently analyzed its customers’ card spending activity and published its findings in a June 24 report:

“Our analysis suggests that consumers are not exhibiting typical recessionary patterns at this time…Interestingly, we found that consumers do not necessarily dine out less during downturns, but rather they shift to cheaper restaurants. Combined Bank of America card data suggests that consumers are not currently shifting in this direction… Travel spending typically declines during recessions, however, aggregate Bank of America card spending data in June indicated the highest share of travel spending since the pandemic began.

In fact, the Number of passengers going through TSA checkpoints are at pre-pandemic levels and will continue to rise. And despite plenty of unfavorable headlines about flight cancellations and rising airfares, Searches for flights are very high.

Keep in mind that consumer finances continue to be very robust. And the number of consumers generating income is increasing: US employers added 2.4 million jobs in the first five months of 2022.

Meanwhile, unemployment is down.

Initial claims for unemployment insurance fell to 233,000 in the week ending June 25 from 231,000 in the previous week. While the number was up from its six-decade low of 166,000 in March, it was close to levels seen during periods of economic expansion.

Zooming out

Huge tailwinds will continue – including higher savings, capex orders and labor demand – strengthening the economy and limiting the negative effects of tighter monetary policy. Perhaps, it is supply with demand that will buy economic recovery for a while.

But until we get “clear and convincing” evidence that inflation is coming down, the Fed will keep pressure on financial markets in an attempt to destroy demand in the economy. So don’t be surprised to see economic data turn sour and stock prices not rise.

Related by TKer:

Recap 📋: A little over a year later, there was a rapid economic recovery Growth in demand outstrips supply, leading to higher inflation rates. However, supply has failed to catch up, hence the Federal Reserve Monetary policy has been tightening In an attempt to bring down inflation by cooling demand. Although economic growth is real Slowing down in recent months, High inflation continues. And now we have even more hawks The Fed is putting more pressure on the economyAnd it is doing so Targeting financial markets.

Last week 🪞

📉 Stocks fall: The S&P 500 ended last week down 2.2% at 3,825.33. The index is now down 20.2% from its January 3 closing high of 4,796.56 and up 4.3% from its June 16 closing low of 3,666.77. For more information on market volatility, read on This is And This is. If you want to read on bear markets, read on This is And This is.

As I wrote last month, the markets seem to be held hostage by the Fed until inflation shows “clear and convincing” signs of easing. Read more about it Here And Here.

Next week 🛣

The marquee event of the week was the June jobs report released Friday morning. We know the labor market is cooling. But to what extent have months of tight fiscal policy slowed hiring? Economists estimated that US employers added 275,000 jobs in the month as the unemployment rate was unchanged at 3.6%.

Wednesday comes with the May job openings and labor turnover survey. As of April, there were 11.4 million job openings, more than double the number of unemployed. This good news is being blamed for high inflation, which is bad. This is one of the things the Fed aims to address with tighter monetary policy. More timely data from Linkup and in fact suggests that job openings levels have been declining in recent weeks.

US financial markets will be closed on Monday for the Independence Day holiday.

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Sam Roe is the founder of Follow him on Twitter at @SamRo.

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