While Wall Street turned to the ongoing crisis in the banking industry, three important pieces of economic data dropped this week…
Namely we’re talking about February’s Consumer Price Index (CPI), the Producer Price Index (PPI) and February retail sales.
In Federal Reserve Chairman Jerome Powell’s two-day Congressional testimony last week, he revealed that he and his fellow Fed officials are laser-focused on upcoming economic data. As Powell and friends head into the Federal Open Market Committee (FOMC) meeting next week, these numbers are an important barometer in the Fed’s key interest rate decision on March 22.
Last week, the employment and payroll data pointed to a strong labor market.
As I shared in Growth Investor last Friday, positive employment data coupled with elevated inflation reports would likely drive the Fed to raise rates by 0.50%. Most Fed officials had anticipated the fed funds rate to reach 5% to 5.5% this year, up from the current 4.5% to 4.75% level. So, if the Fed would return to bigger rate hikes this month, there’s a strong likelihood the fed funds rate could reach 5.5% to 5.75% this year.
But after the fall of Silicon Valley Bank and Credit Suisse’s crash yesterday (more on Credit Suisse’s problems tomorrow) – signs are pointing toward a smaller rate hike.
Couple that with declining inflation and we could be looking at a more dovish Fed next week then we saw last.
In today’s Market 360, we’re going to review this week’s inflation data. I’ll share what it means for next week’s FOMC meeting and the two key things investors should keep an eye on.
Inflation Continues to Cool
On Tuesday, the U.S. Bureau of Labor Statistics released the February CPI report.
The CPI was up 0.4% in February and is now running at a 6% annual pace. That’s down from 6.4% in January. This is the smallest increase since September 2021.
The core CPI, which excludes food and energy, rose 0.5% in February and is now up 5.5% in the last 12 months. However, this is down just slightly from 5.6% in January.
What’s clear is inflation is cooling. The rate of deceleration is just miniscule.
The main culprit? Shelter costs.
Owners’ Equivalent Rent (OER) – the measurement the government uses to track rent and housing prices – is still high. In February, it increased 0.8%, which matches the largest monthly gain since the 1980s.
And what’s frustrating here is that rental and housing costs are leveling off, but that’s not showing up in the economic data yet.
My favorite economist, Ed Yardeni, has shown that rental and housing costs have dropped off for six-straight months. High mortgage rates are one of the main offenders. That said, it’s not showing up in the economic data.
Then, on Wednesday, we received February’s PPI report and February’s retail sales numbers.
The PPI fell 0.1% in February, below the estimate for a 0.3% increase. Year-over-year prices rose 4.6% – which is down substantially from 5.7% in January. The core PPI, which excludes food and energy prices, rose 0.2%, down from the 0.5% gain in January. On an annual basis, that reading was up 4.4% – no change from January’s reading. This is better than the estimate for a 0.4% gain.
Bottom line: Wholesale inflation is starting to ebb.
Then the Commerce Department reported that retail sales fell 0.4% in February. This number was in line with expectations.
When looking at retail numbers, I often keep a close eye on restaurant and bar sales. People spend money at these establishments with expendable cash – if people are going to restaurants and bars, they aren’t worried about money.
The retail report showed that spending at these establishments fell 2.2% for the month. This tells me people are starting to pinch pennies.
Right now, we’re in an economic environment that Yardeni has dubbed a “rolling recession.” There are corners of the U.S. economy that are struggling and have even slipped into a recession (e.g., manufacturing has been in a recession for four-straight months), and there are other corners that are thriving (e.g., the job market remains healthy).
So, what can we do?
Here’s What to Do as We Wait for Fed’s Next Move
As I said, the next FOMC meeting is next week – with the FOMC statement due out on Wednesday, March 22.
It’s likely the Fed will raise rates by 25 basis points. That wouldn’t shock markets.
But here is what I am looking for during this next meeting:
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- The Fed’s Tone – A pivot to a dovish tone would indicate we are coming to an end of this rate hike cycle. After the mess with the banks this week and continued proof that inflation is slowing, this would be a welcomed change.
- The Dot Plot – Every other meeting the Fed releases its dot plot survey. The dot plot shows us where the Fed sees rates in the coming months. If the consensus is for higher rates, we can expect more rate hikes in the coming months. However, the Fed could also show that the rate hikes are working, therefore rates will stabilize from here.
Of course, we won’t know until we hear from the Fed next week. So, while we wait for the Fed, it’s important to stay in fundamentally superior stocks, like the companies I recommend to my Growth Investor readers.
Don’t go making crazy bets in this market.
You want to be investing in companies that have the foundation to stick through tough times and continue to grow.
And stay tuned!
Right now, I see TWO massive economic events on the horizon. Events that the mainstream media is ignoring.
I’ll have the details for you soon, so keep an eye on your inbox.
Regards,
Editor, Market 360
