As I write this piece, just before midday, major US indices are roughly unchanged. The relative lack of movement fits with some of the themes that we have been discussing recently. Good news is good, bad news is bad, the Santa Claus rally is uncertain, and anything can happen in periods of diminished volume.
We sold off just after the open on some modestly worse inflation news. The Fed’s preferred measure, the PCE Core Deflator, came in slightly worse than expected. It was up 0.2% on a month-over-month basis, matching the consensus, but last month’s reading was revised up to 0.3% from 0.2%. That led to a year-over-year statistic of 4.7%, just above the 4.6% consensus. Simultaneously, Durable Goods missed by a fairly wide margin: -2.1% vs. a 1.0% consensus. Down we went, though not dramatically.
An hour-and-a-half later, we bounced on positive reports. November New Home Sales rose by 5.8%, well above a consensus -5.1%. That was largely a numerical fluke, however. November rose by 640,000 when 600,000 was expected, but October was revised down from 632k to 605k. Overall, that’s a net gain of 13,000; solid, but less dramatic than the headline indicated. University of Michigan Sentiment rose to 59.7, up from 59.1, which was also the consensus estimate. One Year Inflation Expectations fell to 4.4% from 4.6%, which again was the consensus. More homes sold, better sentiment, lower inflationary expectations are all good. These were modestly good, so we got a modest bounce.
I wish I could get more excited about the improving inflationary expectations report. Anything that demonstrates moderating inflation should be most welcome news. And of course, th ere is value to learning what average Americans, not just economists, think about inflation. Yet I believe that there is a bias to the expectations conveyed by the Michigan report. See if you can spot it in the graph below.
5-Year Monthly Data, University of Michigan 1-Year Inflation Expectations (CONSPXMD, yellow), Crude Oil, Rolling Front-Month Futures (CL1, red), Gasoline, Rolling Front-Month Futures (XB1, blue)
Source: Bloomberg
It is quite clear that individuals’ inflationary expectations are heavily influenced by the price of gasoline. The anecdotal evidence has always referenced that relationship, but the graph above shows it in black and white (and other colors). Most of us need to fill up our cars regularly, and the price of gas is typically displayed in big numbers throughout one’s travels. It’s much more available data than, say, rents across a wide range of localities. It’s more high-frequency data than wage growth – and far less secretive. No one really wants to buy gas, but they must. It is understandable why many people focus on a non-discretionary, frequent expenditure that brings little pleasure and whose cost is prominently displayed.
Yet this causes a bit of a conundrum. Although Chair Powell has referred to the Michigan Inflation Expectations, it can be at odds with the factors that drive the Core PCE Deflator. The latter measure excludes food and energy, meaning it specifically does not incorporate the factor that most influences the former.
As we see today, good news economic news remains good news for markets. But it is important to keep the positives in perspective – even if light volume holiday trading can amplify both the good and the bad.
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