Week of Feb 20th, 2023

Week of Feb 20th, 2023

We had a shortened week due to the Monday holiday but that didn’t mean we were in for a lackluster week. Volatility spiked as we received news on Tuesday that the rate of disinflation was slowing and we were, in fact, seeing some re-acceleration in inflation – only to be reconfirmed with the PCE number on Friday morning. Any number “hotter” than what was projected, sets the stage for the Fed to remain hawkish and remain on the path of rate hikes.  The question persists whether the Fed will continue to keep rates higher for longer as the reported economic data gives confirmation that they will need to stay the course.

Economic Data:

Tuesday: U.S. February PMIs Bounce. January Existing Home Sales Slow To -37% YoY

February Markit Flash PMIs accelerated in the U.S., albeit from low levels:

*Manufacturing PMI accelerated to +0.9 points to 47.8 -> highest in 4 months

*Services PMI accelerated +3.7 points to 50.5 (back to expansion levels) -> highest in 8 months

*In both reports, we also had an acceleration in “selling prices” and “rate of change in inflation”

**As we’ve seen in other soft data, there is some re-acceleration of inflation currently occurring

*U.S. January Existing Home Sales decelerated to 4.0MM, from 4.1MM

**This is a -37% Y/Y decline and the lowest level in 12+ years

*Wal-Mart (WMT) and Home Depot (HD) reported earnings this morning and guided below estimates. Confirming what we believe to be the beginning of earnings recession.

Thursday: GDP Revised Lower and PCE Revised Higher. MBA Mortgage Apps 28 Year Low

*U.S. Weekly Jobless Claims continue to bounce around near historical lows coming in at +192K for the week, versus +195K in the prior week

**Continuing Claims dropped to 1.654MM, from 1.691MM

*The first revision for Q4 2022 GDP was revised lower to +2.7%, as compared to the initial estimate of +2.9%

**Remember this is reported on a Seasonally Adjusted Annual Rate (SAAR) basis, so quarter-over-quarter annualized

**The incremental negative catalyst was a decrease in consumer spending -> revised from 2.1% -> 1.4% (SAAR basis)

**On a Y/Y basis from Q4 2021 -> Q4 2022, GDP growth was revised lower from 1.0% -> 0.9%

*PCE (commonly thought of as the Fed’s preferred measure of inflation) was revised higher

**On a Y/Y basis for the quarter PCE was revised to +5.7% Y/Y, from +5.5%

**PCE, ex-food and energy, was revised higher to +4.8% Y/Y, versus +4.7%

*Yesterday’s MBA weekly mortgage applications were a train wreck with the index coming in at 147.1, which is -41.3% Y/Y and -18.1% M/M

**This is the lowest level in 28-years

Friday: PCE Inflation Accelerates Alongside Consumer Spending and Income

*Similar to other recent measures of inflation, January PCE came in higher than expectations and re-accelerated from December

**PCE Headline inflation came in at +0.6% M/M (versus upwardly revised +0.2% in Dec) and accelerated to +5.4% Y/Y (versus December’s upwardly revised +5.3%)

**Similar story with Core PCE, which came in at +0.6% M/M and 4.7% Y/Y, with December also revised higher to +4.6% Y/Y

**Obviously, this report is incrementally inflationary and hawkish – the rate of disinflation is slowing

*In general, the income and spending this morning was also incrementally hawkish:

**Real consumer spending accelerated to +1.1% M/M and +2.4% Y/Y

**Personal Income also accelerated to +6.4% Y/Y, which is an 11-month high

**Meanwhile Private Salaries and Wages accelerated to +8.4% Y/Y, from +7.6% last month

**Net-net, the demand side of consumer inflation continues to run hot

*Speaking to Bloomberg this morning, Cleveland Fed President Mester (non-voter) said that inflation readings are still not where they need to be, and that the Fed needs to do more on the policy rate to make sure inflation is moving back down

*U.S. February Michigan Consumer Confidence (Final) accelerated to 67.0, versus 64.9 in January

**1-year inflation expectations accelerated to +4.1% Y/Y, from +3.9% Y/Y

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