The Market Today

Inflation Continues to Outpace Strong Income Gains

by Craig Dismuke, Dudley Carter


Jobless Claims Remain Strong: Initial jobless claims rose 14k in the week ended March 26 to 202k, the fifth lowest reading in more than 50 years. The prior week’s reading was revised up 1k to 188k, now tied for the lowest reading since 1969. Continuing claims for the week ended March 19, however, dropped more than expected. The 35k weekly decline landed claims at 1.307mm, better than the 1.340mm level expected and a new low back to 1969. Combined, the data show that the clouds of uncertainty that have formed over the broader economic outlook in recent weeks have yet to manifest into a visible disruption of the labor market.

Strong Gains in Wage Income Offset by Hotter Inflation: Personal income rose 0.5% MoM in February while January’s income tally was revised up from +0.0% to +0.1%. Driving income higher was a 0.8% increase in employment income from wages.  Transfer payments declined another 0.3% MoM as activity continues to normalize after the pandemic.  Personal spending growth slowed to 0.2% MoM despite the strong wage gains. With income outpacing spending, the savings rate increased 0.2% to 6.3%. The biggest concern going forward, inflation continues to outpace both income and spending. In February, real disposable personal income fell another 0.2% MoM, the tenth decline in the last eleven months. Real spending fell 0.4% MoM.

Headline PCE Inflation Rises from 6.0% to 6.4%: February’s PCE inflation report showed headline consumer prices up 0.6% MoM and core prices up 0.4%, both in line with expectations.  Headline PCE rose from 6.0% YoY to 6.4% and core increased from 5.2% YoY to 5.4%.  An initial look into the details shows a little easing in some goods categories offset by a large gain in nondurable goods costs, particularly food and energy items. Services inflation was slightly softer in February.

Fedspeak and Oil Talk: At 8:00 a.m. CT, New York Fed Bank President Williams is scheduled to speak.  The 10-year yield spiked 10 bps after Williams spoke last Friday and acknowledged a willingness to hike 50 bps if needed. President Biden is scheduled to speak on reducing energy prices today with expectations that he may announce a release of a large amount of oil from the U.S. strategic reserves.  OPEC+ also meets today.


Fed’s George Acknowledges Risks of Fed’s Necessary Aggression: Kansas City Fed President George, a hawk and a current-year voter, said the Fed needs to move its target rate “expeditiously” to a neutral setting and “significantly” shrink the size of the balance sheet. George noted that “with inflation at a 40-year high and the unemployment rate near record lows, moving expeditiously to a neutral stance of policy is appropriate. …The degree to which fading disruptions contribute to an easing of inflation and the lags of policy actions will be relevant for what happens after more-neutral policy settings are accomplished. If at that point inflation shows signs of remaining elevated, more restrictive policy may be required.” Concluding her speech titled “The Path to Price Stability,” George cautioned that “a soft landing is possible but not guaranteed.” “Uncertainty and risks seem likely to accompany each step on the path to policy normalization, demanding equal doses of flexibility and resolve,” George ended.

Fed’s Barkin Open to 50-bp Hike in May: Asked by a Bloomberg TV anchor if a 50-bp hike is in the cards for the May meeting, Richmond Fed President Barkin responded, “I’m open to it.” “I think the question – and we will make this decision when we get to the meeting in May – is how strong does the economy still look in terms of its ability to take rate increases and how high is inflation persisting.” Barkin said he believes “there is a real chance” that the Fed will be forced to move its policy rate into restrictive territory to bring inflation down, but said officials “can make that call” when they are closer to a neutral setting.

Fed Officials Speak on Yield Curve: Minneapolis Fed President Kashkari tweeted Wednesday, “Just reread my yield curve piece from July 2018. While conditions today are obviously different than 2018, I continue to believe the yield curve gives us useful feedback about where the path of policy is relative to neutral.” Acknowledging the 2-year, 10-year inversion on Tuesday, Fed President George commented in her speech that, “My concern about an inverted yield curve does not reflect its intensely debated value as a predictor of recession. Rather, my view is that an inverted curve has implications for financial stability with incentives for reach-for-yield behavior. An inverted yield curve also pressures traditional bank lending models that rely on net interest margins.”


Treasury Yields Drop, Diverge from European Rates as Hot Inflation Stokes ECB Bets: U.S. equities fell for the first time in five days Wednesday as oil climbed and Treasury yields pulled back on a return of worries about the war in Ukraine. Reports of progress in peace talks lifted spirits Tuesday, but caution reemerged early Wednesday after a spokesperson for the Kremlin said there had been “no breakthrough” in negotiations. Oil prices rose more than 2%, cutting into a sharp weekly decline, and energy companies led the few S&P 500 sectors that posted daily gains. The broader index dropped 0.6%, splitting the Nasdaq’s 1.2% drop and the Dow’s 0.2% dip. The S&P 500 had gained 11% over the 11 sessions through Tuesday, marking the strongest such run since the market recovery in April 2020 and since October 2011 before that. Treasury yields had risen overnight alongside gains for European rates but reversed throughout the U.S. session to end notably lower. The 5.8-bp drop to 2.31% pulled the 2-year Treasury yield down from its cycle high and marked a stark contrast to the 6.4-bp increase that pushed Germany’s 2-year yield into positive territory for the first time since August 2014. The 10-year Treasury yield slipped 4.6 bps to 2.35% compared with a 1.4-bp rise for the German 10-year yield to 0.64%. The transatlantic divergence unfolded after inflation readings in Spain and Germany surged from 7.6% to 9.8% and from 5.5% to 7.6% in March, multi-decade fast readings that torched expectations and reflected the severe price impacts of the war. While bets on a higher fed funds rate here in the U.S. took a breather, investors pushed up the expected path of the ECB’s negative deposit rate, projecting a return to 0.00% this year.

Treasury yields fell further overnight and U.S. equity futures were essentially flat, both counter moves relative to the broader trends that have unfolded during March’s market madness. China-linked stocks led weakness across most of Asia after official March manufacturing (49.5) and non-manufacturing (48.4) PMIs fell into contraction. The composite PMI dropped from 51.2 to 48.8, just the second contraction since February 2020. China has locked down major cities in recent weeks under its zero-COVID-19 policy to contain its worst outbreaks since the original strain. Europe’s Stoxx 600 was 0.2% lower before 7 a.m. CT, with consumer stocks leading most sectors lower. Spending data from France and Germany were weaker than expected. Inflation accelerated more sharply than forecast in France to a record 5.1% in March, echoing data from Spain and Germany showing the severe price shock from the war in Ukraine. The inflation outlook, however, received a bit of relief from a nearly 6% decline in oil prices. While OPEC+ stuck with plans for a modest 432k barrels-per-day production increase in May, reports indicated the U.S. is considering releasing up to 1mm barrels per day for several months from the Strategic Petroleum Reserve. For context, the U.S. produced around 16.6mm barrels of petroleum per day (11.2mm of crude oil) in 2021 and consumed just under 20mm barrels per day. Treasury yields were modestly lower ahead of this morning’s U.S. economic data, trailing larger declines across Europe that unwound a portion of Wednesday’s surge. At 7:20 a.m. CT, the 2-year Treasury yield was 0.4 bps lower at 2.30% and the 10-year yield had declined 2.9 bps to 2.32%. Those market levels held up after the data.

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