After the Federal Reserve indicated it was effectively finished raising interest rates last week, the markets got off to an early start to holiday merrymaking.
This week will show whether the Fed’s call was the right one as a series of wide-ranging economic data covering housing, consumer sentiment and inflation will offer a good picture of how the economy is ending the year.
The highlight will likely be Friday’s release of the personal consumption expenditures price index for November. The inflation measure is a favorite of Fed Chairman Jerome Powell and other central bank officials, although far less well-known than the monthly consumer price index.
Expectations are that the overall PCE and the core index that leaves out food and energy costs both fell slightly for the month and year, with the annual rate reaching 2.7%. That is still above the Fed’s 2% annual target but shows a downward trend.
Political Cartoons on Inflation
“Net, net, there isn’t a lot of inflation teed up in the pipeline at the producer level as the pandemic supply shocks are long gone,” said Chris Rupkey, chief economist at FWDBonds.
“Producer prices are showing weakness as manufacturing output at factories
continues to sputter,” he added. “Company executives have said consistently now that manufacturing is in a recession. The only conclusion Fed officials can make as they
vote on policy is that there is no inflation at the producer level and this makes it even more likely they will bring inflation down for a soft landing without bringing the economy to its knees and engendering the huge job losses that occur in every recession.”
There will also be fresh data on the November housing market, with reports on building permits and starts on Tuesday, followed on Wednesday with existing home sales. New home sales are due on Friday. In recent months, sales of new homes have held up well while those of existing homes have suffered from a lack of available inventory.
The data will cover a period before the recent sharp dip in mortgage rates that brought the rate on the 30-year fixed rate loan to around 7% as of Friday. Mortgage rates fell following bond yields that declined in response to the Fed’s decision on interest rates. That sparked a 4% rise in demand for mortgages to buy a new home and a 19% spike in refinancings.
The week’s end brings an update on the mood of the consumer from the University of Michigan. Two weeks ago, sentiment rose by 13% in the preliminary estimate, erasing four months of declines, as consumers expressed greater approval of current and future conditions. Expectations of inflation fell sharply from 4.5% a month ago to 3.1% now. It is the lowest level since March 2021.
Gasoline prices have fallen in recent weeks, nearing or below the $3 a gallon mark in many states, while incomes are holding up as wages grow at rates above inflation. That is likely to provide consumers with enough firepower to make it a decent holiday shopping season.
“As 2023 comes to an end, it is increasingly clear that not only did the economy avoid a widely anticipated recession, but it was also a great year for the economy. Real GDP is on track to grow a heady 2.5%, unemployment has remained below 4%, and inflation has quickly receded,” Moody’s Analytics Chief Economist Mark Zandi posted on social media.
While Powell refused to be drawn into saying the Fed might actually lower rates at his press conference, the central bank did upgrade its economic and inflation forecasts for next year and beyond. Gross domestic product for the fourth quarter was revised upward to 2.6% annual growth from 2.1% previously, while economic growth in 2024 is forecast at 1.4%.
The Fed projects that overall inflation will hit 2.4% by the end of 2024.
All in all, it may be the Fed has some celebrating to do as well.
The Federal Reserve’s decision to indicate that it is done raising interest rates has led to an early start to holiday celebrations in the markets. This week’s wide-ranging economic data will determine whether the Fed’s call was correct, as it will provide insights into housing, consumer sentiment, and inflation. The highlight will be the release of the personal consumption expenditures price index for November, which is favored by Fed Chairman Jerome Powell. Expectations are that both the overall and core index will show a slight decrease from the previous month and year, but will still be above the Fed’s 2% annual target. Other data to be released include reports on housing market performance, which will cover a period before the recent dip in mortgage rates. The week will end with an update on consumer sentiment, which showed a significant increase in the preliminary estimate two weeks ago. Gasoline prices have fallen, and incomes are holding up, suggesting a decent holiday shopping season. Overall, the economy has performed well this year, with GDP growth, low unemployment, and receding inflation. The Fed has upgraded its economic and inflation forecasts for next year and beyond, indicating a positive outlook.
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