Economic consensus is growing, but the path faces challenges.
Over the past few months, a series of better-than-expected economic data has led many investors to believe there is a possibility of a soft landing in inflation, which would see inflation fall to the Federal Reserve's 2% target without a severe economic downturn. I had accepted it.
Recent data over the past week casts doubt on that theory. January's inflation report from the Consumer Price Index (CPI) and Producer Price Index (PPI) showed that prices rose faster than economists expected last month. And January's retail sales report showed sales fell more than economists expected. In other words, neither inflation nor consumer strength improved.
For some, a month's worth of printouts can be a concern, but it's not necessarily a game-changer.
“Let's not get excited if the CPI for the month is higher than expected,” Chicago Fed President Austan Goolsby said Wednesday during a question-and-answer session hosted by the Council on Foreign Relations in New York. “It's absolutely clear that inflation is coming down.”
While Goolsby may be pointing out that a single piece of print may not change trends, the recent set of January statistics is worth noting. That's because this is the first data to refute the soft-landing theory since Federal Reserve Chairman Jerome Powell signaled that the U.S. economy could be headed. toward an ideal outcome at the December Fed meeting.
“The data is stacking against investors and it's making people nervous,” Liz Young, head of investment strategy at SoFi, told Yahoo Finance Live.
Until last week's statistics, the data wasn't working against investors. Economic growth in the fourth quarter exceeded expectations. January's jobs report shocked economists. Retail sales also beat expectations in December, but rising wages continued to provide a positive outlook for consumer spending and inflation continued to moderate.
But since this week, economists have been cutting their forecasts for first-quarter gross domestic product (GDP), a popular measure of economic growth. Earlier this week, Goldman Sachs lowered its growth forecast for the first quarter from 2.9% to 2.3%. The Atlanta Fed's GDP forecast has been revised downward from February 8th's estimate of 3.4% to 2.9%. This does not bode well as an economic growth factor for a soft landing.
The data will also drive forecasts for personal consumption expenditures (PCE), the Fed's preferred measure of inflation, ahead of its release later this month. Goldman now expects core PCE, which excludes volatile food and energy categories, to rise 0.43% in January, up from its previous forecast of 0.35%. Bank of America's economics team also expects it to be closer to 0.4%.
Notably, this would return the six-month and three-month annualized rates, which had recently been praised for being below the Fed's 2% target, to above the 2% level. Not auspicious as his second element of soft landing.
“January data is noisy, but inflation data shows that disinflation returned two steps in January,” Bank of America U.S. economists Stephen Juneau and Michael Geipen said in a note to clients on Friday. It suggests that.”
Juneau and Gapen said January's inflation numbers support the Fed's “wait-and-see approach” to rate cuts, adding to the emerging market consensus that the first rate cut will be in June rather than March or May. I wrote that I agree.
This shows a major shift in investor sentiment regarding the Fed's interest rate cuts. Investors are currently pricing in a roughly 35% chance of the first rate cut coming in May, according to the CME FedWatch tool. A month ago, investors were pegging a 97% chance of the first rate cut by the end of the May meeting.
Questions about the Fed's interest rate cuts have largely been answered for now, but the question remains whether two ominous data points – inflation and consumer strength – have eclipsed hopes for a soft landing.
Gapen said in his weekly economic review that it was still too early to tell.
“Our (perhaps unsatisfactory) view is that investors should continue in wait-and-see mode,” he wrote.
“Surprises in employment, inflation, retail sales, etc. [industrial production] It was probably all a combination of signal and noise. …We need to see several more weeks of data before drawing any strong conclusions about the economic trajectory. ”
Consumers say things are still going well.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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