Personal Consumption Expenditures surprises markets

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Published Date 2/24/2023

Markets waited all week for the 8:30 am ET data this morning. Inflation stronger than forecasts. The Jan PCE m/m expected +0.4% increased 0.6%, year/year estimates +4.9% increased 5.4%. Core PCE m/m +0.6% against 0.4% expected, year/year core thought to be +4.3% increased 4.7%. Jan personal income expected +1.0% up just 0.6%; personal spending in Jan was stronger, +1.8% with forecasts of 1.2%. The reaction is what we would expect, the 10 year note yesterday declined 4 bps to 3.88%, on the news 3.93% +5 bps. Initial MBS prices at 8:45 am -28 bps from yesterday. Adding more to the increase, Dec PCE revised from +0.1% to +0.2%, year/year from 5.0% to 5.3%; core from 0.35 to +0.4%, year/year from 4.4% to 4.6%. The equity markets took the strong inflation negatively, the DJIA at 8:45 am -349 in futures trading. The stronger inflation news sent the 2 year note up 7 bps to 4.77%. By 10 am the 10 year at 3.95% at the high yield since last Dec.

Recent data confirming the economy remains strong, better retail sales, PMI service sector index now over 50 (expansion), weekly jobless claims the lowest since prior to the pandemic, consumer spending firm, wages increasing. Now this morning inflation is stronger than forecasts putting the Fed deeper into potential rate increases. Yesterday, Jamie Dimon, CEO of JPMorgan Chase said, “I have all the respect for [Fed Chair Jerome] Powell, but the fact is we lost a little bit of control of inflation.” Inflation over the last four months has edged lower until this morning’s news; is it a one-off data point? Can the Fed successfully increase rates at a quicker pace without pushing the economy into recession?

At 9:30 am the DJIA opened -345, NASDAQ -188, S&P -54. 10 year at 9:30 am 3.95% +7 bps. FNMA 5.5 30 year coupon at 9:30 am -42 bp and -33 bps from 9:30 am yesterday, the 6.0 coupon -42 bp and -32 bp from 9:30 am yesterday.

At 10 am the final Feb U. of Michigan consumer sentiment index, slightly better than 66.4 expected at 67.0.

Jan new home sales expected at 617K increased to 670K; Dec sales revised from 616K to 635K.

Inflation has been slowing, the report this morning counters the idea inflation will continue to subside. With every inflation report the view changes pending how the news is released. This morning the outlook for higher rates increased and suggests the increased worry about a coming recession. It is a moving target; a lot of comments with little conviction behind them. Traders and investors dismayed, the 10 year note yield at its highest since late Dec and renews the view the Fed and other central banks haven’t dented inflation. Yes, it is one data point, but it’s a very key one for the fed using PCE as the primary inflation measurement. Not just in the US, European Central Bank policymaker Nagel said that a "robust" rate hike is needed in March and that more hikes are likely to follow.

Source: TBWS

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