- Scott Poore, AIF, AWMA, APMA
Deck The Halls With Fed Fears
Markets have turned back to the "good news is bad news" framework this week, despite no Fed speakers and nothing to contradict Fed Chairman Powell's statements of last week.
This week's holiday inspiration comes from the oft sung favorite, "Deck The Halls." The song was first published as a poem, although the poem scarcely resembles the song we sing today. The first recording of the song is attributed to 1860, with Welsh music and American lyrics. Here are some interesting trivia notes about the Christmas classic:
This song can be performed completely royalty-free, which is why so many artists have sung various versions of the song.
The music is said to have been used by Mozart in a piano/violin duet in the late 1700s, long before the release of the song.
The original Welsh lyrics had the line, "Fill the meadcup, drain the barrel," which was removed around 1877.
Though thousands of artists have record and/or performed the song, Nat King Cole's version was arguably the most successful. While Cole originally recorded his version in 1960, his rendition entered the Billboard Hot 100 nearly 60 years later peaking at #43.
Here's what we've seen this week...
Deck the Halls With Fed Fears. Even though we haven't had any Fed speakers this week and Fed Chairman Powell confirmed a slower pace of rate hikes last week, investors have been fearful this week.
With every good piece of economic news, investors have interpreted it to mean the Fed may raise rates more than forecast. And yet, futures on the December rate hike have been constant all week at between 74% and 79% probability for 50 basis points. Both the Services PMI and ISM Non-manufacturing PMI rose more than expected and the ISM measure rose more than last month and is still showing expansion.
Factory orders rose for the 3rd consecutive month and grew 3 times more than the previous month. More good news on the inflation front as Unit Labor costs declined for the 4th consecutive quarter. November's Producer Price Index was released this morning and was the 5th consecutive month of declines on a year-over-year basis. However, the month-over-month reading was higher than expected and even with October's number. It's important to remember that inflation doesn't just fall off a cliff when prices ease. Sometimes, inflation might rise one or more months in a declining cycle. The table shown above indicates the 14 periods prior to this year when PPI declined after peaking on a year-over-year basis. Only 3 of the 14 periods showed consecutive declines in PPI over 6 consecutive months or more after peaking. In 78% of the cases, PPI had an "interruption" in declines, but was also lower 12 months later, with the average decline being -11.8%. Market futures were trading higher by about 0.5% until the PPI number was released, only to decline by more than 1% in response to the unexpected PPI print. So far, markets are trading slightly down after absorbing the number.
‘Tis The Season To Be Jolly...Or Not. One of the notables from the PPI print this morning was that Services was the biggest contributor in the rise of prices for producers. We have discussed this previously, in that, "inflation" is the new "COVID" excuse.
As suppliers and employees claimed tardiness in deliveries was because of "COVID" in 2020 and 2021, "inflation" is now being used as the excuse for higher prices being charged by service providers.
Plumbers, Electricians, etc. are charging higher prices even though most of the goods and energy prices that effect their business have declined. The average price at the gas pump has plummeted over the past two months (down 16% since mid-October). Most of the rise in goods for November as Food-related, which does not effect many service providers.
Once consumers stop accepting higher prices and begin shopping around for less expensive service providers, the services component of PPI/CPI should begin to recede. However, fears over further Fed rate hikes and possible recession next year have prevented investors from being excited about holiday sales. Redbook Sales have remained above so far this holiday season. This week, Redbook Sales did decline, but the 1st week in December typically sees a cooling in growth as consumer take a breather following Black Friday & Cyber Monday.
Over the past 7 years, the first week in December has seen lower growth in the weekly number, only to bounce higher by the end of December. We have to remember that, for now, consumers are at the helm of the economy. The recent preliminary Consumer Sentiment numbers released by the University of Michigan this morning showed a nice bump higher in sentiment, but more importantly, the Inflation Expectations for consumers fell to the lowest level since September of 2021. If consumers believe that lower prices are ahead, spending is likely to remain stable. That being said, now is not the time to make severe changes to your investment portfolio. Dry powder is recommended until we get through year-end and see what the Fed is likely to do as we near the end of rate hikes next year.
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