Marking Time and Consolidation

The stock market is likely to mark time if not consolidate recent gains this week, as there are few US economic data releases and the to-be-released FOMC Minutes are not likely to change consensus expectations for Fed policy.  Many of the important January economic data reported so far have been jostled  by start-of-year effects and weather.  These factors could unwind in the next set of data, but this won't be known for another couple of weeks or more.

Currently, the data point to moderately strong economic growth and sticky inflation.  The latest Atlanta Fed and NY Fed models project 2.8-2.9% (q/q, saar) for Q124 Real GDP Growth, based on data released so far.  This is down from the prior 3.5% projections, but they remain above the 1.7-1.9% Fed Central Tendency forecast for all of 2024.  The latter is still achievable if upcoming data are soft.  Indeed, the model projections are high relative to the weakness seen in Total Hours Worked in January.  A slowdown in Payroll growth looks likely at this point, as Continuing Unemployment Claims are above their level in the January Payroll Survey Week.  They have to stay high for another two weeks to get to the February Survey Week.  In contrast, some bounce-back in Retail Sales is likely in February, as the weather improved. 

The January CPI and PPI came in high, but much of the surge appeared to reflect start-of-year price hikes.  (Both the downside and upside risks mentioned in last week's blog showed up among the CPI components, but the upside risks dominated.)   The start-of-year price hikes most likely will prove to be one-off.  However, wage inflation and housing rent need to slow to bring inflation down permanently.  

The next Employment Report will show whether the jump in Average Hourly Earnings (AHE) in January was a fluke.  If AHE does not slow sufficiently, Fed rhetoric may become less dovish.  

Housing rent in the CPI, especially Owners' Equivalent Rent (OER), has not yet softened as much as rent measures seen in private surveys.  Indeed, OER sped up unexpectedly in January.   The speedup could have been just catch-up after a below-trend increase in December.  Even if it slows back to trend in February, the 0.4-0.5% m/m trend is still too high.  

There is less than meets the eye in OER, however, even though it is heavily weighted in the CPI.  OER is a phantom price, inasmuch homeowners don't pay it.  It is the imputed price of their use of homes and is calculated from a subset of the CPI rent sample.  In other words, it is the rent a homeowner would pay if renting the house.  Fed Chair Powell acknowledges its artificiality by emphasizing Core Inflation Less Shelter.   This inflation measure has been running in line with the Fed's 2% target.  It rose 0.2% m/m in each of the past three months and was up 2.2% y/y in January.  It should dampen market concerns that the Fed will turn hawkish.