Moderating inflation data boosts Indices, Commodities

Lower-than-expected inflation data, along with weaker personal consumption price data and a disappointing consumer sentiment index, provided an additional boost for stocks this morning, as this lessened fears of another rate hike. Wall Street rebounded and the broader commodity sector did well.

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Encouraging inflation trends, but still not enough …

This morning’s Personal Consumer Expenditure (PCE) data was weaker in its key income, spending and price inflation components – this is notable, as the Federal Reserve gives special attention to the core PCE price index, ex volatile food and energy sectors, as it monitors inflationary trends. This data also showed that the real economy is still healthy, in respect of incomes and spending.

While monthly inflation numbers are encouraging, they still translate into an annual inflation rate of roughly 3.6%, above the Fed’s mandated 2% level. We can’t reach that lower 2% level without bringing balance to the jobs market, and this would inevitably cause economic pain.

Our economics team argue that you can only bring wage inflation down by increasing the supply of workers, decreasing the demand for workers, or some combination of both. The Fed doesn’t have a tool in its toolbox for increasing the supply of workers. A decline in demand for workers requires a contracting economy. We believe there might be a middle way, with pressure mounting on the Fed to increase its 2% inflation mandate rather than experiencing economic pain.

Weaker personal sector data

• The core PCE price index rose 4.6% year-on-year in February, down from analyst expectations that it would remain unchanged at 4.7%.
• The PCE price index, and the core PCE price index, ex volatile food and energy sectors, both rose just 0.3% month-on-month in February, down from analyst expectations of 0.4% and just half the 0.6% gain seen in January
• Personal incomes rose 0.3% month-on-month in February, in line with expectations, but down from 0.6% gains in January
• Personal consumption expenditures rose 0.2% month-on-month in February, again in line, but down notably from 2.0% gains in January

Consumer sentiment moderates

• The University of Michigan consumer sentiment index, also tracked by the Fed, showed an increase in consumer expectations of a recession in March, particularly tied to the headline banking sector problems
• A consumer who expects a recession tends to slow their spending and not quit their job unless they have another one lined up, which in turn tends to ease inflation pressures
• The headline consumer sentiment index came in at 62.0 for March, down five points from the 67.0 seen in February, but above the 59.4 posted a year ago
• The current conditions index fell to 66.3, down from 70.7 the previous month, and also below the 67.2 posted a year ago
• The index of consumer expectations that looks out over the coming year fell to 59.2, down from 64.7 the previous month, although still above the dismal 54.3 posted a year ago

Major indices ahead

• The broad S&P 500 index was up 0.5% at 4,049, while the tech heavy NASDAQ was up 0.7% at 12,004
• The VIX, Wall Street’s fear index, traded down to 19
• The dollar index was unchanged at 102.4, with £/$ 1.24 and €‎/S 1.09
• Yields on 2- and 10-year Treasuries were lower at 4.14% and 3.51%, respectively

Oil stronger, US planting intentions anticipated

• Crude oil prices were up 1% by midday to $74.17 per barrel
• Grain and oilseed markets are now focused on trading the midday data dump from USDA
• The US Department of Agriculture (USDA) pegged March 1 planting intentions at 92 million acres, matching our commodity team’s expectations, but about a million acres above trade expectations
• The USDA over-stated the size of last year's crop, as it "found" more winter wheat acres than previously forecast

Russian inpired commodity inflation should decline, one year on

• Russia’s invasion of the Ukraine caused commodity prices to surge a year ago on fears that the flow of essential food and energy products out of this commodity-rich part of the world would slow
• We expect some decline in the headline year-on-year numbers as we pass that one-year anniversary

Analysis by Arlan Suderman, Chief Commodities Economist.

Read more of Arlan’s thoughts at StoneX Market Intelligence at https://my.stonex.com/