The S&P 500, Nasdaq 100, and Dow Jones Industrial Average enter today with some record closing-high momentum. There was good reason in yesterday’s Q4 GDP report, too, to retain that momentum. Growth was not only better than expected, it was also above potential at the same time the GDP price deflator was lower than expected and below the Fed’s 2.0% inflation target.
Granted the Fed hasn’t pinned its inflation target to the GDP price deflator, but there was no mistaking in yesterday’s report that inflation moved in the right direction in the fourth quarter.
It was a nice lead in to today’s Personal Income and Spending Report for December, which does contain the inflation gauge the Fed is targeting with its monetary policy.
Given that understanding, it was reasonable to see the S&P 500 futures and 2-yr note yield little changed in front of the report. A wait-and-see stance was in play for the broader market.
There was some added movement in the Nasdaq 100 and Dow Jones Industrial Average futures, however, stemming largely from the negative price action in Intel (INTC) and Visa (V), which disappointed with some guidance metrics after reporting their December quarter results. A positive move in American Express (AXP), after its FY24 EPS outlook exceeded the consensus estimate, provided a bit of an offset for the Dow futures.
The equity futures market took a dip in the immediate wake of the aforementioned economic release, presumably because it played into the idea that the Fed may not be as quick to cut rates as the market would like. Ironically, that’s not so much because of the inflation gauges as it was because of the spending gauge.
Personal income increased 0.3% month-over-month in December, as expected, but personal spending increased a much stronger-than-expected 0.7% (Briefing.com consensus 0.4%). The inflation gauges were spot-on with expectations. The PCE Price Index was up 0.2% month-over-month and so was the core-PCE Price Index, which excludes food and energy.
With the December changes, the PCE Price Index was up 2.6% year-over-year, unchanged from November, and the core PCE Price Index was up 2.9% — the lowest since March 2021 — versus 3.2% in November.
The key takeaway from the report should be more Goldilocks than anything else: consumer spending is strong and core inflation, which the Fed is targeting, is moving toward the 2.0% target.
If one wanted to split hairs, there could be some dismay that inflation didn’t improve more than it did, suggesting there is some stickiness to it; however, keep in mind that the market, which has been running to record highs in front of the report, knew exactly what the consensus estimates were and both the PCE Price Index and core PCE Price Index fell right in-line with the consensus estimates.
In other words, there were no negative inflation surprises in this report; therefore, it would be a stretch to assign the knee-jerk selling immediately after the release to any stickiness as it relates to inflation.
If anything, the market may have wanted “more,” so when the inflation gauges were only in-line with expectations, there was some selling on the news following the spirited move in the market this week.
Currently, the S&P 500 futures are up four points and are trading 0.1% above fair value, the Nasdaq 100 futures are down 32 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are up five points and are trading fractionally above fair value.
The message here is that the equity futures market bounced back from the knee-jerk selling, just as the Treasury market did, which one could cite as a support for the turn in the equity futures market. The 2-yr note yield went from 4.32% to 4.35% and is at 4.33% now. The 10-yr note yield went from 4.11% to 4.15% and is at 4.12% now.
As it stands now, then, the broader market is poised for a mixed and flattish open, which isn’t bad knowing that the Fed’s key inflation gauge wasn’t bad in December.
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Originally Posted January 26, 2024 – No true surprises in December PCE inflation data
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