Trend watch and what’s new this week
Most things are in “holiday mode,” essentially coasting into year-end, which skews the activity-based data (slides 5 and 6). For instance, dining reservations have drifted lower, but air passenger counts and hotel occupancy both rose in the most recent week.
Inflation cooled in November, but still a long way to go
On slide 7, we show the Consumer Price Index (CPI), which edged up 0.1% in November. The year-over-year pace slipped to 7.1% from 9.1% in June and the fifth straight decline.
On slide 8, core CPI, which excludes food & energy, rose 0.2% month over month, the coolest pace in 15 months. It rose 6.0% from a year ago. Prices rose for services, including shelter (rents) increased 0.6%, its smallest month-over month (MoM) increase in four months.
On slide 9, we show some possible inflation scenarios. While there are a wide range of potential outcomes, we expect CPI to trend toward 3% to 4% by year-end 2023. That would be considerably lower than the peak this past June, but above pre-pandemic levels. Of course, a recession would accelerate the cooling of prices.
On slide 10, rental price growth—from a different data source—has continued to moderate on a month-over-month basis. It inched up just 0.05% in November, the smallest increase since 2015 (excluding the pandemic). The pace declined for the fifth straight month and the 12th time in the past 15 months.
Consumer spending slipped in November
On slide 11, we show retail & food sales, which fell 0.6% in November, just below the all-time high set in October. Auto sales and gasoline sales, which combined comprise almost a third of total sales, declined. Excluding both, sales slipped 0.2%, though also remain just below the all-time high. Department stores continued to struggle, but food service and drinking establishments sales rose.
Freight metrics continued to decline in November
On slide 12, we show two key metrics within the freight gauges. First, unit volumes of shipping containers at three top U.S. ports dropped again in November. That was the fifth straight MoM decline and is now well-below the long-term trend. Secondly, the Cass Freight Index, another key freight metric, has declined in five of the past six months and is just above its long-term trend. The sharp pullback in freight is not a good sign for overall economic growth.
Fed steps down the size of rate hikes, but remains hawkish in inflation battle
The Federal Reserve (Fed) raised interest rates by a half point (0.50%), stepping down after four straight supersized hikes of 0.75%. More importantly, the Fed’s projections for the federal funds rate moved higher and doesn’t include rate cuts next year. That’s a mismatch from what markets expect for 2023 and will likely contribute to the ongoing volatility in yields.
In totality, the Fed remains quite hawkish based on the large half point rate hike, the Fed’s economic projections, and Chair Powell’s press conference. Our view remains that a U.S. recession is increasingly likely due to tightening financial conditions as dramatically higher interest rates place additional stress on consumers and businesses going forward. Accordingly, we continue to advocate for more defensive and up-in-quality portfolio positioning, across both equities and fixed income.
However, there are many clear signs of cooling inflationary pressures. A wide variety of prices—from gasoline and shipping costs to lumber and automobiles—have shown clear signs of cooling in recent months. Rents and home prices have now joined the chorus. After more than two years of sticker shock, this is welcomed news for most Americans.
The one exception is within the labor market. There have been limited evidence of weakness. That’s very consistent with historic job loss patterns, which tend to be gradual rather than falling off the proverbial table.
Indeed, layoff announcements are becoming a daily occurrence. However, the aforementioned layoffs have been largely in big tech and haven’t really shown up thus far in weekly jobless claims.
Most tech jobs are categorized within the information and professional & business services industries groups. Neither of these have seen job losses, even at the sub-industry level for computer-related positions. This suggests that many of these workers are finding other jobs, skipping the unemployment line at least for now.
Given the lag in employment, this pattern of limited “bad” jobs data will likely persist for several more months. Accordingly, we have increasingly seen pockets of strength¾most notably, within the service sectors of the U.S. such as health care and education—that could push a recession further back into 2023 than the first half downturn the consensus currently expects.
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