Telemus Weekly Market Review July 10th - July 14th, 2023
This past week markets cheered inflation data for the month of June. The Consumer Price Index (CPI) showed prices rising 0.2% during the month, dropping the annual inflation rate to 3.0%. That’s quite a comeback from a year ago when the annual CPI stood at 9.1%. More comforting was a deceleration in core inflation (which excludes more volatile food and energy categories). Core inflation had been stuck around an annualized rate of 5.0% throughout the first half of 2023. A 0.2% increase in core CPI indicated that inflation may be coming down across the board. This was cheered by stock and bond investors alike. The S&P 500 ended up rallying 2.4% on the week. Bonds added 1.5% as Treasury yields fell among maturities one year and longer.
There frankly wasn’t anything to pick apart in the June CPI report. It was strong all around and should be cheered. That said, inflation data is anything but consistent and its too early to state whether June’s data marks a new trend. In fact, in July of last year the monthly CPI reading was flat. It quickly reaccelerated from there. Our focus in recent months has been on the core CPI. We’d be more constructive on the inflationary outlook if that remains at more depressed levels in the months to come.
The improvement in inflation comes on the back of continued strength in employment data. The unemployment rate currently sits at 3.6%, near a 50-year low. The economy continues to add jobs, although at a moderating rate. The number of job openings per unemployed is down to 1.6-to-one having been as high as 2-to-1 a year ago.
While no question employment and inflation are trending in a positive direction, we remain grounded in our assessment of economic conditions. First, wages have grown 4.4% over the past year. Wages can’t continue to grow at this level and still have inflation get to and remain near the Fed’s 2% target. In addition, inflation tends to be cyclical and has a history of rearing its head as policies ease. The Fed seems very conscious of this having had to endure three different waves of inflation in the 1970’s, each one stronger than previous (highlighted in the chart below). We have to recognize that some, although not all, of this cycle’s uptrend in inflation was due to shifts in demand for goods that have more recently seen less consumption. Should demand shift back to these categories, we could see some reacceleration in inflation. Thus, one can’t get overly confident after one or even a handful of positive months of inflation data.
Source: FRED, St. Louis Federal Reserve, Bureau of Labor Statistics
We are, however, more optimistic on the ability of achieving a softer landing for the economy. Recession risks appear further off than we had expected earlier in the year, yet it’s too early to concede that they are in the rear-view mirror. In fact, the New York Federal Reserve’s recession probability indicator suggests a 2/3 probability of a recession. Should the U.S. economy succeed in avoiding a pullback, we’d expect the rate of economic growth to still be rather tepid. Although we’ll gladly take that over going backward. A steady U.S. economy would also be a divergence from what is occurring elsewhere around the global. China’s economy appears to be at a standstill, while Europe has entered a recession.
What we’ve learned over the last few years is that the stimulus juiced economy has become much harder to forecast and predict. Moreover, many trends have tended to be short lived. Therefore, while we come away from this past week more optimistic around the inflationary picture, and economy as a whole, we continue to be measured in our assessment of economic conditions.
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