Inflation has moderated in recent months, with the PCE price index rising by less than expected 0.1%.
The markets have felt some relief from the recent rate cuts by the Federal Reserve, which were “hawkish”.
The report is a complicated picture that policymakers, investors and economists alike must balance in order to maintain economic growth while controlling inflation.
The inflation rate is below target, but still above the target
In addition, the Commerce Department report released on Friday showed that PCE prices increased 2.4% from October to November.
The slight increase in annual inflation is partly due to the fact that lower readings for last year were not included.
The PCE index rose by 0.1% excluding volatile components such as food and energy, which is a slight decrease from the 0.3% increase in October, unrevised.
The core inflation rate increased to 2.8% in the twelve months ending November. This is identical to October’s number.
The mixed data shows that, while inflation is above the Fed’s target of 2%, price pressures have eased.
Market Reaction
According to a Reuters article, the response of the market to inflation data has been notable. The S&P 500 closed down -0.51% while the US Treasury 10-year rates fell to 4,506% and the 2-year rate dropped to 4.259%.
Dollar index showed also a decline of 0.42 %.
Adam Sarhan is the chief executive officer of 50 Park Investments. He noted that “the market has a bit of relief rally. The Fed said on Wednesday inflation was still the No. 1 enemy of society. 1. “They cut the rates, but inflation still wasn’t where they desired it.”
Sarhan states, “As such, the reaction is bullish from the standpoint of the major indexes…because the data removes the danger that the inflation has gotten out of hand…Today’s data does not force the Fed to act.” The Fed is not in a position to increase rates because it’s still too cool. Hence the rally. “We’re oversold on the short-term.”
Chris Zaccarelli, chief investment officer at Northlight Asset Management, told Reuters that “The market woke up in a terrible mood – an unexpected government shutdown and a more-hawkish-than-expected Fed are to blame – but this morning’s inflation data came in lower-than-expected and took some of the edge off.”
He also says that “We will watch the last 15 minute of trading to see what we do.” The market will be in a downward trend if the sell-off continues throughout the day.
Market reaction seems to be a struggle between short-term relief, and the lingering uncertainty about future Federal Reserve actions.
Balance sheet of the Fed
Brian Jacobsen is the chief economist of Annex Wealth Management. He told Reuters, “Powell has to be tired of data that undermines what he claims. The Fed’s recent shift towards hawkishness is not supported by lower inflation and slower growth in spending. Auto sales are not likely to drive growth in the coming year. The average consumer isn’t spending more money on their everyday purchases. “The Fed is likely to change its tune again soon.”
These contradictory economic signals are a major challenge to the Fed and highlight the difficulty of managing economic policy in uncertain markets.
As new information becomes available, this post US Inflation Cools Down in November: Offering Relief During Fed Concerns may change.
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