The Fed’s New Key Inflation Rate Cooled In November; S&P 500 Wavers

The core rate of inflation, watched closely by the Federal Reserve, eased further in November, albeit by less than expected. Yet Fed Chairman Jerome Powell has recently focused on a new “most important” inflation rate to make the case for rate hikes: PCE services less housing, which fell to 4.3% last month. The S&P 500 rose slightly, reversing early losses after the personal consumption expenditures report.


The PCE (personal consumption expenditures) price index rose 0.1% on the month. The PCE inflation rate continued to ease from June’s 40-year high of 7%, falling to 5.5%. Core prices, minus food and energy, rose 0.2% on the month as the annual core inflation rate eased to 4.7%.

Wall Street had expected a 0.2% increase in the PCE price index and a 0.2% increase, with an overall 5.5% inflation rate and a 4.6% core rate.

Paul is changing the goalposts with a new key inflation rate

Paul’s favorite new inflation rate could be more difficult for the S&P 500. The gauge creates commodity inflation, which falls rapidly. It also doesn’t include housing inflation, which looks set to fall in 2023 as government data shows market rent growth stagnates.

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This leaves only basic services other than housing, such as health care, education, hospitality and haircuts. Because price changes for such services are closely related to wage growth, they provide the best signal about underlying inflation, Powell said.

This statistical focus is so new that it has not been provided in a Commerce Department report or in the context of Wall Street estimates. IBD calculations show that the price index for PCE services minus housing and energy rose 0.3% on the month and 4.3% from a year ago, down from a 4.7% annual increase in October.

The headline monthly inflation reading for PCE services minus housing and energy fell 2.1% from October, but remained 11.8% above last year’s level. Inflation for health care services fell to a 0.2% monthly gain.

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The Fed’s new key inflation rate isn’t great for the S&P 500 because it focuses on the strongest part of the economy: the tight labor market. Until the labor market breaks, wage growth will remain firmly elevated, and the Fed may raise its benchmark interest rate for longer than markets anticipate.

The S&P 500, Treasury yields react to the PCE inflation rate

After the PCE inflation report, the S&P 500 rose 0.2% in Friday morning stock market action. The Dow Jones Industrial Average rose 0.2%, while the Nasdaq Composite lost 0.2%.

The S&P 500 and the broader market have come under pressure since the Fed’s half-point rate hike and are forecast to tighten further to a range of 5%-5.25 percent in 2023. Worries about the earnings outlook and concerns over China’s covid blow are adding to concerns. Make the feed too hard. Yet the bond market doesn’t seem to be buying the Fed’s guidance. As of Friday morning, markets were pricing in a 4.75%-5% higher rate.

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As of Thursday’s close, the S&P 500 is down 20.3% from its record high close on Jan. 4. While the S&P 500 remains 6.9% off its 52-week closing low, the index has fallen below its 50-day 200-day low. moving average

The 10-year Treasury yield rose 6 basis points to 3.75%.

Be sure to read IBD’s daily afternoon Big Picture column to stay on top of the main market trends and what they mean for your trading decisions.

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