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Three Four Becomes One Six While One Six Becomes Three One

CAMS Weekly View from the Corner - Week ending 4/26/24

April 29, 2024

If the order of the numbers in today’s subject title were turned around we would be in excellent economic shape and the often referenced “Narrative” of the last year-plus would be spot on.  Unfortunately the order of our numbers is accurate and speaks to our economic reality as updated late last week. 


They present a reality that is leaning toward an undesired backdrop (think stagflation) and is a far cry from the long standing narrative that - price inflation is done/growth will not miss a beat/Fed cuts rates many times - as has been shared from consensus economic pundits ad nauseam and similarly questioned ad nauseam for our part throughout many editions.


Last Thursday the Bureau of Economic Analysis released an update on Gross Domestic Product (GDP) for the 1st quarter of 2024.  For perspective, in the 4th quarter of 2023 real GDP came in at an annual growth rate of 3.4% while our updated 1st quarter 2024 result came in at an annual growth rate of 1.6%.  3.4% becomes 1.6%. 


The consensus expectation was for a 2.5% annual growth rate.  With the release reality came in considerably under expectations and notably under the previous quarter’s growth rate.   


GDP releases also offer a price inflation index known as the GDP Implicit Price Deflator.  The GDP price inflation index for the 4th quarter of 2023 came in at an annual growth rate of 1.6% while our updated 1st quarter 2024 result came in at an annual growth rate of 3.1%.  1.6% becomes 3.1%.


Placed together the numbers flipped from what has been generally hoped for and expected.  The growth rate decelerated while the price inflation measure accelerated


The numerous rate cut expectations from consensus narratives have gone up in flames.  There were expectations for as many as six rate cuts in 2024 to have begun in March.  With the continual economic updates in recent weeks we have seen the six cuts dwindle down to perhaps one.


Via the CME’s FedWatch Tool rate cut expectations have been reduced notably in number and continually pushed out on the timeline.  Target rate probabilities now offer a November timeframe as a small odd’s chance via expectations for a cut with December offering a higher probability. 


PCE Confirms the Storyline


The Federal Reserve has a long favored price inflation measure known as the Personal Consumption Expenditure – chain type price index – PCE for short.  This price inflation metric was also updated last week and did not add any confidence to rate cut expectations.


On a year-over-year basis the PCE Price Index was up 2.7%.  For perspective the previous month’s read came in at 2.5% which reflects an uptick in the percentage growth rate of the Fed’s favored measure. 


This PCE price inflation measure is reflecting the highest level we have seen in 2024 which confirms various price inflation releases in recent weeks to include the GDP price inflation index shared above.


Within the PCE price inflation measurements are more specific areas of the economic landscape. 


Services price inflation is an important area in light of how dominant the services economy is within our economic backdrop.  This area of the economy has become sticky if not stubborn with its on-going price inflation.


Last week’s PCE release continues to point to the stickiness of services price inflation.

The above depicts Services price inflation for this 21st century for some historical perspective.  Our red horizontal line notes how we have consistently remained above even the high points of the previous twenty-plus years. 


Speaking to the stickiness of price inflation for this area of the economy its declining rate of growth has stalled and remains stubbornly consistent at the general 4% year-over-year growth rate level.  As long as this important area of the economy continues to be relentless with its growth in pricing, the broader more recognized measures such as CPI as well as the overall PCE price index will not be acting in a manner that supports interest rate cuts.


This Price Inflation Era Refuses to End


Nowhere in the price inflation data in recent months as well as recent weeks point to a pricing landscape that offers this price inflation era is coming to an end. 


This week the Federal Reserve meets again for another interest rate setting meeting.  Along with this the standard post-meeting press conference is planned for Chairman Powell to share his thoughts on what the Fed is thinking relative to the general economic data since their last meeting.  It is a certainty that no change in rate policy will occur at this upcoming meeting.


For our part it will be interesting to see if the Chairman continues to espouse how the Fed has tightened financial conditions considerably over the previous year while in reality financial conditions have loosened in the previous year and considerably so in the previous six months. 


We have curiously asked along the path if we could realistically put this price inflation era to rest while simultaneously seeing broad financial conditions loosening on a trend basis in recent months to nearly a year.  History offered no and thus far history appears to be correct.


Relative to this sub-topic of the upcoming Fed meeting, interestingly in very recent week’s general market participants have leaned toward tightening financial conditions for their part as the non-friendly price inflation data continues to roll out. 


As offered above, part of this process by said participants is their notable rollback of previously expected rate cuts to something unrecognizable when viewed through the lens of just a couple of months ago.


While economic growth has decelerated per the updated GDP we do not see evidence across the spectrum that the economy will go into recession anytime soon. 


This is not to say our growth rate is humming along splendidly nor does it speak to the quality of this growth as shared in recent editions.  The incredible amount of debt taken on to achieve our current growth cannot be ignored.  For now though the economy looks to be recession free in coming months.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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