It looks like we're going to end this month the same way we started it--with hotter-than-expected economic datapoints.
This morning, we got the "truer" read on inflation with the January PCE report. It's kind of like the smarter cousin to CPI, but most importantly, it's the one the Fed is truly targeting when it talks about having a "2% inflation" goal.
To give you a sense of the mood leading up to it, well, let's just sum it up as "fear." "Above 4.6% would be bad," wrote Andrew Brenner of Natalliance before the release. (These are all core numbers.) "Below or at the expectations of 4.3%, then markets could rally." What did the year-on-year core number actually come in as? 4.7%. Ouch. And December's print was revised up two-tenths to 4.6%! That's why stocks are dumping this morning.
After the release, we also hit new highs on the market's expectations for Fed rate hikes. The futures are now pricing in rates at 5.24% by year-end! That's up almost a full point just since January 1!
It's interesting how we started the month with equities and risk in "relief rally" mode as the payrolls report ruled out the possibility that a recession had already begun. But we are ending with much more of the 2022 vibe; anxiety over Fed tightening, and what that means for future growth prospects. It's almost like we moved from "soft landing?" to "no landing!" to "hard landing" over the course of three weeks. In like a lamb, out like a lion.
And I can tell you, if the market thinks 5.24% by year-end, there are plenty of people betting on even higher than that. "My best guys have had a 6.25% terminal rate," one longtime trader told me yesterday, adding that they're also saying "disinflation" is the new "transitory," and the Fed will come to regret using that term so much.
"The risk now is whether the Fed shifts back into full attack mode and delivers are larger half-point hike at the March meeting, and ups the terminal rate forecast to 6% this year," wrote Chris Rupkey of FWDBONDS after the PCE release. Indeed.
But let me just add one note of caution. Not thirty days ago, you could have argued that half of the NBER's indicators were already in recession. Yes, all of the January data came in hot; but November and December were pretty horrible months leading up to that. So is the coast now suddenly clear? Is the economy really accelerating in a sustainable way?
As Jason Trennert of Strategas told us yesterday, "corporate profits are slowing, which does not augur particularly well for employment." We already reported what ZipRecruiter said about a big slowing in job openings, which sent their shares down almost 25% earlier this week. "I think the odds are good that you do get a recession later this year," Trennert said.
All told, if the Fed tightens a whole lot further now because of these lagging inflation reports, it seems all the more likely that we could get both 6% rates and a recession this year. "Story developing badly," as Rupkey put it.
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Kelly
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