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Some major economics reports turned in surprisingly strong numbers last week — with January retail sales and CPI prints both beating economists’ estimates. Personal consumption expenditures, to be released on Friday, may continue that trend of a consumer continuing to spend even as economists predict a recession in early 2023.
The PCE price index and overall level of personal spending could extend that string of surprises, considering January’s robust labor market data, said Amelia Bourdeau, managing director of market strategy at Diamond Standard.
“You wouldn’t expect to get inflation moving down too significantly because consumers are obviously out there spending, and one of the reasons why they’re probably spending is jobs are picking up but also inflation has come down,” she said in an interview with Seeking Alpha. “Things are a little more affordable than there were a few months ago, but they’re still pricey.”
Personal consumption expenditures are expected to rise about 1.3% M/M vs. -0.2% in December, personal income is expected to increase 1.0% M/M vs. +0.2% in the prior month . PCE price index is expected to climb 0.4% M/M, or 4.9% Y/Y, according to consensus estimates. Core PCE price index, which the Fed closely watches is expected to rise 0.4% M/M, or 4.3% Y/Y.
A higher-than-expected number won’t be good for equities, because that implies that the Fed has more hiking to do, she added.
Bourdeau will be focused on the personal spending number, because the January retail number was so much higher than expected. “And if it surprises to the upside, I think we’re going to get a repricing of rates. So I think that’s the number to concentrate on,” she said.
“We’ve had strong retail sales, strong jobs numbers and these aren’t bad things to have. This is not a problem, this is good,” Bourdeau said. “It just means that inflation is going to be stickier for longer than perhaps the market thought.”
That resiliency in the latest economic reports improves the chances of a so-called “soft landing,” she said. Bourdeau expects an “exciting year in the markets to trade… It’s going to be volatile because people are in a recession camp, a soft landing camp and a ‘no landing’ camp.” In talking with hedge funds and institutional investors, “it’s looking to ‘soft landing’ to ‘no landing’ right now,” she said.
Consumer spending, which accounts for about 70% of U.S. GDP, will be key to whether the U.S. can navigate a soft landing, said Dana Peterson, chief economist at The Conference Board during a media briefing on Thursday. “The consumer is really the driving force behind this.”
The stronger-than-expected January retail sales could be related to the mild weather during the month, Erik Lundh, principal economist, U.S., at The Conference Board said. He’ll be looking at personal consumer expenditure number on Friday to gain more insight on the direction of the economy. “We’re really going to have to focus on the consumer over the next month or so,” he said.
Currently, the markets are pricing in a peak fed funds rate of ~5.2%, which aligns with the Fed’s own projections, Diamond Standard’s Bourdeau said.
Market participants currently put a 73% probability of a 25-bp rate hike to 4.75%-5.00% in March and a 70.3% probability of another 25-bp hike in May. And the chances of a fourth rate hike in June — to 5.25%-5.5% — are a little higher than 50%, according to the CME FedWatch tool.
After the PCE report, the next big data point to look at will be the February nonfarm payrolls report, after January’s blow-out number, and then the February consumer price index number in mid-March, both of which come out before the Fed’s March 21-22 meeting.
Earlier on Thursday, the Commerce Department revised down its Q4 GDP estimate on lower consumer spending growth.
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