Behold, the macro. First, some macroeconomics for the numerically challenged. The data is for July. It is compiled and published by the Bureau of Economic Analysis. If you, like me, think inflation has long since apexed… this was music to your ears. Personal Income hit the tape at +0.2% year over year. Wall Street was looking for 0.6%. Personal Spending crossed at +0.1% m/m. The smart guys with the erasers and the calculators were expecting 0.4% here. Clear evidence of slowing economic growth/activity.
On to consumer level inflation using personal consumption expenditures or PCE, the Fed’s favored measurement for such price discovery. Month over month, PCE printed at -0.1%, (that’s right, it was down), while core PCE hit at +0.1%. Expectations were for month over month inflation of +0.1% at the headline, and +0.3% at the core. Hmm, that is truly comforting. Really no month over month inflation.
Now, for the all-important year over year numbers. At the headline, PCE hit the tape at +6.3%, down from +6.8% in June and tied for the lowest print since January. At the core, the annual print crossed at +4.6%, down from +4.8% in June, down from the apex for the series at +5.3% back in February, and a new low for this series since October 2021.
That’s right, core inflation is now at its weakest since last Halloween. This is before much of what the Fed has done can even be felt on Main Street, USA. Inflation, core inflation in particular, indeed did have a transitory quality to it. On that note… take it away, Jay.
The Fed Chair
I wish I could call Jerome Powell’s speech “short and sweet”… well it certainly was short. The Fed chair obviously chose to ignore the data. The speech was a warning, a warning that monetary policy is likely to remain aggressively hawkish, even at considerable cost to the economy despite the above data released just today that shows that current consumer level inflation is not exactly out of control.
Powell, and by extension, the committee, apparently want to not only control inflation and pull annual inflation down to their 2% goal, but also wants to completely stamp out any expectations for anything other than stable prices. In fact, Powell opens with comments on how key price stability is as “the bedrock of our economy.”
Powell earnestly states that steps taken to slow the rate of investment and spending “will bring down inflation, they will also bring some pain to households and businesses. Those are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Just a thought… in my experience, recessions are plenty painful.
In fact, Powell reaches back to the 1970’s for precedent. He spoke of errors made at the central bank that permitted a period of both turmoil and rapid inflation that led ultimately to President Carter placing the now legendary Fed Chair Paul Volcker at the head of the Federal Reserve in 1979.
Volcker, as all know by now, increased rates, slowing the economy, and finally getting inflation under his control. The whole series of events caused more widespread pain, in Powell’s opinion, than if Volcker’s predecessors had taken necessary action in a more timely (aggressive) manner.
Powell leaves you with this… “The longer the current bout of inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”
Where Do We Go From Here?
Equity markets that have been slow to trust the Fed’s aggressiveness, have sold off a bit further in the wake of the speech. All eleven S&P sector-select SPDR ETFs have moved into the red, with “growthy” sectors moving toward the bottom of the performance tables. The US Ten Year / Two Year yield spread that went out at -32 bps on Thursday, is now trading around -38 bps. A negative spread signals economic contraction. A more deep inversion signals potentially a deeper recession.
The speech was an attempt by the Fed Chair to tell the investing public that he (they) are willing to and even intend to damage the US economy in order to further arrest both inflation and inflation expectations. For you and I, it comes down to whether we think the committee will blink once there is no doubt about economic contraction, and once the labor market is indisputably at the epicenter of the contraction.
As an Investor?
This speech which amounted to a commitment that I do not believe had to be made, is telling me to reduce over all long-side exposure and to especially lighten up on tech or growth type investments. Powell is literally telling me to be more of a trader less an investor, at least for now.
He even indicated that another jumbo interest rate hike might be necessary in the near future. You and I both know that this will be an error in policy. Unfortunately, we do not have a say in policy. A sentient voice in the wilderness needs to be heard, immediately.
As a Trader?
That rejection for the S&P 500 on August 16th at the 200 day SMA will likely, if the Fed sticks with what this speech lays out, be like the copse of trees standing out at Gettysburg about a mile away from where Pickett’s troops stepped out.
I change my mind all the time. Traders do that. Investors have to stand and fight. That is not how I think you fight this Fed. Guerrilla tactics is how to go about it from here, until the committee realizes that it has/is erred/erring. Light at night. Light on weekends. Staying cashy. Now, good luck, and God bless.