02/17/23 – Are Prices Sticky Downwards?
This week’s economic data was far worse than we had feared! We had hoped that 400 basis points of rate hikes would have slowed the economy and eased the rate of inflation, but to no avail. The January consumer price index, month-over-month, registered 0.5%, and 6.4% on a year-over-year basis, outpacing consensus expectations.
On Wednesday the BLS released a solid retail sales report with a monthly gain of 3.0%, as miserly spending during the holidays was offset by robust post-holiday sales. The bad (for bonds) news continued on Thursday with the producer price index, the lesser watched inflation measure, registering well above expectation. The month-over-month PPI was 0.7%, which translates to nearly 9% per year when compounded. With numbers like those, it’s impossible for the Fed to claim any progress in its inflation fight.
The Fed speakers this week continued their reversion back to hawkish language with Cleveland Fed President Loretta Mester saying there was a compelling case for the Fed to move 50 basis points at the last meeting, instead of the 25 basis points hike they implemented. Mester is not a policy voter this year which is why the vote for 25 basis points was unanimous. Nevertheless, we have to wonder if she’s speaking for the entire committee when she said she doesn’t think the Fed will lower rates later this year.
With all that news, the bond market performed remarkably well. The 2-year note closed the week at 4.60%, about 10 basis points higher than last Friday, and a few basis points below its recent high of 4.79%. Similarly, the 30-year bond is closing the week 10 basis points higher at 3.89%, but still below the 4.38% high touched last October.
In separate, non-market impacting news, the somewhat newly minted Fed Vice-Chair, Lael Brainard, is leaving her job to head the National Economic Council. Along with Former Chairwoman Yellen, Ms. Brainard will be second former Fed member to join the government, and in our opinion, the move dilutes the independence of the Central Bank. Similarly, Austan Goolsbee joined the Fed in January after serving as economic advisor to the Obama White house. Our worry is that the independence of the Fed is blurring into partisan politics. For now, whomever is on the committee is on the hook for the current inflation mess and politics will likely take a back seat.
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