Disappointing holiday sales and margin pressures. Not a good combination for any stock. And today shares of Macy’s (M), down 6.39% as of 2 p.m. New York time; Lululemon (LULU, down 9.01%, and Chico’s FAS (CHS) down 9.41% are paying the price for disappointing Wall Street.
The big investing and economic question for 2023 is How hard will it be to push inflation to something near the Federal Reserve’s 2% target? The answer will determine (at least until rising unemployment gets the Fed to blink in the second half of 2023) how far and how fast the Federal Reserve will have to raise interest rates, how big a danger a true recession is, and how much of a slowdown we’ll see in economic growth and corporate profits? And the answers to those questions will largely determine the direction of the stock market in 2023. I’d like to offer two of my own observations from my personal Christmas shopping season free of charge to those economists who are now grappling with these questions. My personal experience says that inflation will be stickier than the consensus on Wall Street now believes. And that it will be very, very hard to push inflation back to the Fed’s target range without a true recession.
Today I posted my two-hundred-and-seventeenth YouTube video: Where Do We Go From Here?
Today’s topic: Where Do We Go From Here? We got better-than-expected CPI inflation numbers yesterday. Economists were expecting a 7.3% headline annual rate and we got 7.1%. For the core rate, expectations were at 6.1% and we got 6.0%. In the hour following the CPI report, the S&P 500 jumped about 1.6%. If the Fed announces the expected 50 basis point rate hike and doesn’t shock the market with unexpected bad news, we’ll likely see a traditional Santa Claus rally. The question of the Fed’s Dot Plot projections remains my long-term concern–as we try to understand how long the Fed will continue to raise rates and when we are likely to hit the Fed’s goal of a 2% inflation rate. We’re currently at about 7% and I expect getting down to 5% or so will be pretty painless. Beyond that, How we go from 4-5% to 2%? could be the crucial question for 2023. Until that 2% is in view for the Fed, I don’t think the central bank will back off completely. We’ll see if this Santa Claus rally can stay convincingly above 4,000 in the S&P 500. If we do move above that level, I think we can expect the rally to continue until about February or maybe even early March. And then we’re likely to see a drop in stocks because of a lower growth rate for corporate earnings and continued inflation fighting from the Fed.
Today the Bureau of Labor Statistics reported that headline CPI inflation in November climbed at a 7.1% annual rate. Month-to-month inflation rose by just 0.1% from October. Core inflation, that is inflation without energy or food prices, rose at a 6.0% annual rate with a 0.2% increase in November from October. Both the headline and core inflation numbers were better than economists had projected before this morning’s data release. Economists surveyed by Bloomberg had projected that headline Cpi inflation would climb by a 7.3% annual rate and 0.3% month over month. Core inflation was projected to move higher by 0.3%. The news certainly shows inflation on the decline. And that was good news for stocks ahead of tomorrow’s meeting of the Federal Reserve’s interest rate-setting body the Open Market Committee.
Tomorrow, Tuesday, December 13, the Bureau of Labor Statistics will report November CPI inflation. Economists surveyed by Bloomberg estimate headline CPI to increase by 0.3% for the second consecutive month, with year-over-year CPI falling from 7.7% to 7.3%. Core CPI inflation, which excludes food and energy prices, is projected to climb at a 0.3% monthly rate or 6.1% year over year. (I would note that economists have underestimated the inflation rate in five of the last seven months.) Yes, inflation is slowing and it looks like we have seen a peak in the inflation rate. But, and it’s a big BUT, inflation is falling at a very slow rate.
Nonfarm payrolls increased by 263,000 in November, the Labor Department said today. (And the October jobs total was revised upward to a gain of 284,000.) The unemployment rate held steady at 3.7%. Average hourly wages rose 0.6% in November from October. That was the biggest increase since January. Wages are now up 5.1% year-over-year. Economists surveyed by Bloomberg were looking for the economy to add 200,000 jobs in November and an unemployment rate of 3.7%. All of this shows a labor market that remains in top gear when the Federal Reserve has been looking for weakness in the jobs data as a sign that higher interest rates are slowing the economy enough to reach the Fed’s inflation rate goal.
Inflation progress in October but painfully slow. PCE–personal consumption expenditure–in inflation, the Federal Reserve’s preferred inflation index, rose at a 6% rate year over year rate through October. That was down from a 6.3% rate in September. The core PCE index, which strips out food and energy costs, rose at a 5% rate, roughly where it’s been for most of 2022.
In a speech today Federal Reserve Chair Jerome Powell clearly confirmed what other Fed officials have said this week: 1. The Fed will raise interest rates at its December 14 meeting by 50 basis points and not 75. That would follow on four straight 75 basis point interest rate increases. 2. The Fed will moderate the pace of its interest rate increases going forward. 3. The peak for the Fed’s benchmark interest rate will be “somewhat higher” than estimated in September. The Fed’s estimate in September was for a peak of 4.6% in 2023. The current benchmark rate is 3.75% to 4.00%. The Fed Funds futures market sees rates peaking at about 5% in the second quarter of 2023. What he didn’t clarify is what that peak rate might be or when the financial markets might see it.
Today I posted my two-hundred-and-ninth YouTube video: Is the Fed Confusing or Just Confused? Today’s topic: Is The Fed Confusing, or Just Confused? First, Mary Daly, president of the San Francisco Fed came out with a very mixed message about the Fed’s December 14 meeting. The market seems to have decided that the Fed will raise rates by just 50 basis points, she said, but that it’s still too early to decide and a 75 basis-points increase is still on the table. But, she then added, the Fed is worried about overcorrecting and causing a recession. Then, Loretta Mester, president of the Cleveland Fed, announced that she is open to slowing the rate of the rate hikes, but was unclear on what “slowing” would actually mean. I think the key to market direction after the December meeting is the Dot Plot Summary of Economic Projections. The last time the Fed released a Dot Plot was September and it’s already wildly out of date. The September projected inflation rate for 2023 was 2.6-3.5% and 5.3-5.7% for 2022. Both projections will likely be revised higher in December. Inflation isn’t coming down as fast as the Fed thought in September, but it is coming down. Big question for the financial markets, though: Is it coming down enough? Rate hikes of 50 or 75 basis points are on the table but does the Fed now think it can stop raising the rates? My conclusion is that the Fed sounds confusing because the Fed is actually confused.
Not all price increases are equally sticky.
Some jumps in cost are likely to get countered quickly because the goods or services in question exist in highly competitive marketplaces. And competitors are likely to cut prices to gain market share as soon as that’s feasible.
Other prices are sticky and unlikely to get rolled back quickly if at all. Much of this stickiness results from markets that act as oligopolies where companies don’t compete on price but instead follow the lead of their competitors in pricing higher and higher. The stickiness of inflation matters a great deal right now because it’s a big factor for the Federal Reserve in figuring out how many interest rate increases will be necessary to tame inflation. The stickier inflation is the higher the Fed will have to raise interest rates. From this perspective, the recent round of price increases from package shipping companies–from pretty much all of them–is bad news indeed for the Fed and inflation.
After Thursday’s CPI inflation report, stocks have a clear path to move higher in a strong rally through the end of the year. Critically, the October inflation report, which showed inflation falling slightly more than expected, gives Wall Street the data it needs to sustain its favorite rally story: Inflation has peaked and is heading down. Which means the Federal Reserve will soon pause its policy of increasing interest rates early in 2023 and pivot to cutting interest rates by the middle of the year. You could see that story at work in the huge jump in Treasury prices and the huge drop in yields. The yield on the 10-year Treasury fell 23 basis points to just 3.86% on Thursday That’s a huge move–and deeply significant–considering that the yield on the 10-yer bond was above 4%, at 4.21% on Monday, November 7.
Expect another big macroeconomic report to hang over stocks, depressing volatility. After all, who wants to get out ahead of Thursday’s Consumer Price Index inflation report for October?
