Weekly Market Update: December 11, 2023
Inflation continues to trend in the right direction. The Personal Consumption Expenditures (PCE) Price Index, which is the assessment of the inflation situation most closely monitored by the Federal Reserve, was unchanged on a month-to-month basis in October, and the core-PCE Price Index, which excludes the food and energy components, was up 0.2%. On a 12-month basis, the PCE Price Index and core-PCE Price Index increased 3.0% and 3.5%, respectively. Although the one-year figures were still running above the Federal Reserve’s target rate of 2%, they showed an easing in inflation, which had to please data-driven central bank policymakers.
The Federal Reserve was expected to hold the federal funds rate in the range of 5.25% to 5.50% at its December monetary policy meeting. The Federal Open Market Committee (FOMC) had another round of consumer and producer (wholesale) price data and labor market figures to consider before making that decision, but all signs point to the Fed leaving the benchmark rate unchanged and keeping the “high for longer” interest-rate narrative in place.
The recent data on the U.S. economy have been mixed. Both housing and manufacturing activity weakened this fall, and the leading indicators are suggesting the pace of economic growth will slow in the first half of next year, as the full effects of the most restrictive monetary policy course in 40 years are seen.
Is the recent action in the gold market portending some problems ahead? The yellow metal is usually seen as a safe haven for investors in times when economies are facing challenges or during periods of elevated inflation. With inflation, as noted, starting to ease, the pickup in demand for gold may signal some concerns about the U.S. economy as we soon move into 2024. Wall Street is thinking the lead bank will need to begin cutting interest rates in the second half of next year. The price of gold hit an all-time high in early December.
Conclusion: The continued pullback in Treasury market yields has powered the recent equity market rally. For this trend to continue, we think inflation will need to continue to ease, and the U.S. economy and labor market will need to avoid weakening notably.