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Yet Again We Hear, “These Prices Are Ridiculous”

CAMS Weekly View from the Corner – Week ending 4/28/2023

May 1, 2023

“My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.” Transcript of Chair Powell’s Press Conference — March 22, 2023 (federalreserve.gov) Jerome Powell, Chairman Federal Reserve

Heading into the writing of today’s edition our intention was to focus on the Federal Reserve being they are front-and-center with another scheduled interest setting policy meeting this week. We remain focused on the Fed but with a change in subject title after a barrage of happenstance comments, yet again, just yesterday.  On a personal note, it seems I cannot go about a day without having it offered to me “….these prices are ridiculous….” which immediately awakens the analyst within me offering an inner snide remark “hmm, thought the Fed had that fixed.” The inner snide remark comes from attempting to square up the disconnect of the everyday citizen’s price inflation experience with collective Wall Street consensus that the price inflation thing is so yesterday.  Interestingly, said consensus has been around for some time now and equally interesting so has said disconnect between the citizenry’s daily experiences relative to the Wall Street consensus. Much broader than the Wall Street consensus is the collective market participant’s view.  They have a central focus of looking out into the near-future as they attempt to read the proverbial economic tea leaves and price assets today according to what they think they see downstream.  They do not always get it right. Relative to price inflation they have been consistently wrong.  Price inflation was supposed to be a short-lived experience with the Fed “pivoting” soon as had been believed many times in the previous year-plus, if not two years. Stopped Clock Analysis The above elicits the trusted stopped clock analysis – keep offering the same conclusion over and over again regardless of how many times said conclusion has been proven incorrect.  Just as the stopped clock is correct twice a day so too will be the on-going stale conclusion given enough time. The question is, of which we have offered several times in recent editions, can price inflation recede to the Fed’s on-going stated 2% inflation target without bringing in a recession?  History answers with a solid – “no way.” Speaking to this the overall economic landscape continues to soften with numerous measures offering a consistently slowing experience out in econ land.  This past week we saw the most recent update to Gross Domestic Product (GDP) where it too continues to weaken.  The consensus expected a slower level of growth with a 1.9% expectation but reality per the government’s release offered an actual result of 1.1%.  Obviously the consensus expectation missed it considerably.  For recent perspective the previous quarter’s growth rate was 2.6%.  Got slowing?  In total, the previous quarter’s GDP growth was 2.6% with an expected 1.9% for this quarter while reality presented a 1.1% result.  This while price inflation remains stout.  That’s stagflation experientially defined. History offers we do not experience an embedded price inflation storyline without a recession following.  Per the above descent in growth, recession seems to be coming onto the scene.    As always this does not come with a guarantee but regardless what we are living through and will continue to live through is stagflation at best. With this, impromptu price inflation comments seem likely to continue amongst the citizenry in the near-term at least. The Chairman’s Prepared Remarks Our header quote is excerpted from Chairman Powell’s prepared remarks after the Fed meeting in latter March.  We emphasize prepared remarks in that they were not off-the-cuff comments in reply to some type of statement or question.  Per our underlined and emboldened section within the quote we note how Chairman Powell called out his own entity in offering price stability is the responsibility of the Federal Reserve.  We know this per their mandate but find it interesting that he specifically stated this in prepared remarks. Stating the obvious the Fed has failed miserably at their primary function of price stability – think “These prices are ridiculous” amongst the citizenry a solid two years-plus since the take-off point of ever rising prices.  To be fair to the Fed price inflation does extend beyond their policies as other facets of government play their own roles but certainly an expected central focus of the Fed is overall price stability. More Rate Hikes Coming As we head toward the Fed meeting this week currently the implied 30-Day Fed Funds futures pricing data offers a near 85% expectation of another ¼% interest rate hike. Upwards of a year ago the consensus offered the Fed would be pivoting to lowering rates “soon” which continues to be proven silly talk.  We remain well north of the Fed’s insistent 2% inflation target far down the timeline of this price inflation period. This past week the Fed’s favored price inflation measure known as the Personal Consumption Expenditures: Chain-type Price Index (PCE) and all its sub-components were updated.  In the previous six-plus months Chairman Powell has consistently highlighted the Fed’s concern relative to Services price inflation.  He has essentially offered until we see notable progress in this area the price inflation fight is far from over.

Above is the PCE inflation measure Services sub-component dating back to 1960 for broad perspective.  The far right depicts the well recognized uptrend we have been living through the previous couple of years.  What stands out is the little to no progress even with the most recent release.  To place a detailed point on the result the current release reflected a 5.5% increase in year-over-year growth in Services pricing while the previous month reflected a 5.8% increase.  The 5.8% level was the highest level reached on this current uptrend so we can see the 5.5% current level is offering little progress from a trend perspective.  It will be interesting to hear what Powell and friends have to offer around some of these price inflation details this week.  With little progress reflected in their focused Services area it will be interesting to see what their updated view is on this specific area of concern and how they view it within the overall price inflation context. For now, expect another ¼% hike this week. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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