MARKET VIEW WEEKLY

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• Friday’s Personal Consumption Expenditure (PCE) Price Index report dominated headlines over a relatively quiet week for economic data, but not in a good way. o Headline PCE rose 0.6% month-over-month in January – the largest increase in seven months. o “Core” PCE, which excludes the volatile food and energy components, also rose 0.6% month-over-month – the most in six months and above market expectations.

• Both of these increased their respective twelve-month (year-over-year) measures, reversing established downtrends in PCE prices on an annual basis. o Headline PCE year-over-year ticked up to 5.4% from 5.3% in December. o The “Core” PCE price index, the Fed’s preferred inflation gauge, is up 4.7% in the past year, a notch above the previous month’s reading of 4.6%.

• “SuperCore” inflation, another measure the Fed watches closely these days, which is services only (no goods), excluding food, energy, and housing, also increased 0.6% in January – the largest jump in any month since late 2021. o This specific metric climbed to 4.6% year-over-year, dramatically above the Fed’s broad inflation target of 2%. o Showing little improvement since the 5.0% reading for the twelve months ended January of last year, SuperCore inflation seems to suggest that “the economy outside the interest rate-sensitive components – which only make up 20% of GDP – is simply not slowing down.”2

• Federal Open Market Committee (FOMC) minutes from the February 1 meeting released on Wednesday and confirmed recent Fed messaging and guidance that a stronger U.S. economy and stubborn inflation could lead them to raise interest rates somewhat higher, keeping them elevated for longer, than originally anticipated. o “While the quarter-point rate rise was backed unanimously by the rate-setting committee, the minutes said a few officials favored or would have also agreed to support a half-point increase.”

Melissa MinterMarch 6, 2023news, Weekly Market Update, timely topics, Investing

Overview

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The year began with the government stymied by a shutdown, and ended with articles of impeachment levied against the president. In between, both domestic and global economies showed signs of slowing, all while the trade war between the United States and China loomed throughout the year. Nevertheless, investors remained relatively bullish toward stocks, pushing several major indexes to record highs.

While domestic economic growth may have slowed in 2019 compared to 2018, it showed resilience and stamina. The third-quarter gross domestic product expanded at an annualized rate of 2.1% — moderately down from 2018's 3.0% rate, yet still strong enough to outpace global economic growth by a considerable margin. Consumer spending — which accounts for about two-thirds of the U.S. economy — surged, buoyed by a strong labor market, near-record unemployment, solid wage growth, and a burgeoning stock market. All told, the domestic economic expansion continued into its 11th straight year, the longest run in U.S. history.

Last year saw trade disputes between the United States and several of its trade partners reach an accord, but the trade war with China roared. The world's two largest economies engaged in a tit-for-tat skirmish, with each country volleying tariffs on their respective imports at the expense of the exporting nation. Coincidentally, a limited deal was announced just before the holiday shopping season, with the U.S. agreeing to forgo new tariffs and China assenting to allow more U.S. agricultural imports. Further negotiations are presumed, but the relationship between the economic giants remains tenuous at best.

Not only did the ongoing trade war affect global economies, but it also impacted domestic business investment, industrial production, and exports. Part of the justification cited by the Federal Reserve for lowering interest rates three times last year was weakness in business fixed investment and exports. As of November, new orders for durable goods were down 1.3% from the same period in 2018, and business (nonresidential) investment fell 2.3% in the third quarter.

The new year begins with a strong stock market and solid economic growth. The Secure Act, passed in late December, should change the retirement planning (and saving) landscape to some extent. However, the Treasury budget deficit for fiscal 2019 (October 2018-September 2019) exceeded $980 billion — 26% higher than the 2018 fiscal-year deficit. The trade war with China may cool with more mutual concessions, or accelerate, which would continue to dampen global economic growth. The new year will begin with the impeachment process and end with November's presidential election. What happens in between is anyone's guess. Will unemployment and inflation remain low? Will stocks continue to experience growth? Will oil and gas prices moderate or surge? Will the domestic economy continue to accelerate, or suffer a setback? Can the world economy recover, or will it continue to stagnate? If nothing else, 2020 looks to be an interesting year.

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MARKET VIEW WEEKLY

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