August 2023

As expected, consumer prices rose in August, rising more than consensus expectation.  The year-over-year measure of CPI registered 3.7%, up from 3.2% last month, but the core CPI for the same period fell from 4.7% to 4.3%.  That’s far from the Fed’s 2% target but the anecdotal slowing in the economy is likely enough to keep the Fed on the sidelines at the September 20th FOMC meeting, but not enough call the current monetary policy the peak.

Muddying the outlook somewhat was the retail sales report for August.  For the month retail sales were up 0.6% versus the 0.1% expectation, but the July measure was revised 0.3% lower.  Taken together, retail sales paints a picture of a more cautious consumer but not one cautious enough to pull back on spending.

Away from official government reporting, the psychological impact of inflation is having a real impact on wages.  Auto manufacturers are locked in a union negotiation that is the most public battle in recent memory.  On Friday September 15th, the United Auto Workers launched a targeted strike against the big three auto manufacturers, demanding a 40% pay raise among a host of other benefits.

Similarly, UPS resolved an equally contentious union negation last month that will result in the average full-time driver taking home $170,000 annually in pay and benefits.  Consequentially, UPS announced that the company intends to raise average prices 5.9% in the coming year.  Needless to say, inflation expectations are beginning to become entrenched.

The Fed is likely to look past the wage issue and focus instead on the signs of a slowing economy.  The housing market has arguably been in recession for 18 months and consumer confidence remains at depressed levels.  The one bright spot that has been unshakeable as the Fed raised rates has been the employment sector, but that is starting to look like it will change.  Non-Farm payrolls have gained less than 200,000 new jobs (a level that is typically associated with an expanding economy) for three consecutive months.  The slight elevation of the unemployment rate to 3.8% from the 3.4% touched earlier this year is hardly cause for panic, but the Jobs available and unfilled measure which touched 12 million in early 2022 plunged to 8.8 million in August.  While still above the pre-pandemic average it appears that potential employers have changed their mind about expanding their workforce.

The one, as yet unmeasured, economic variable is the expiration of student loan abatement.  After a three-year pause, student loan accrual and repayment is set to begin again.  Accrual commenced as of the first of this month and on October 1st, borrowers will again begin to repay their debt.  It’s estimated that the aggregate monthly payment is $18 billion, and that amount is likely to directly impact consumption, and in turn, economic growth.

Against that backdrop the market continues to push yields higher.  The 30-year bond yield rose to 4.44% in August and is currently trading a few basis points below that.  Similarly, the two-year note briefly rose above 5.0% in the month.  It seems that 5.0% is the bogey for many fixed income buyers as it has risen above that level six times in the last month only to immediately reverse lower.

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