Fed Watch – 3/15/2024

Brian Beaulieu:
Hello, I’m Brian Beaulieu from ITR Economics. Welcome to this edition of Fed Watch, and today is March 15, the Ides of March, always very important for a forecaster.

There are some interesting news this week that I think the net result is going to be the Fed is going to be pretty much taken May off the table for a Fed decline based on these latest numbers. This still could happen. The futures market says that it still could, but I’d lean more into June, July for it to start happening.

What came out is the CPI. The consumer price index showed a little bit more strength in the latest data, which was January. And then the Fed would probably like to see the 112 rate of change moved up to 3.2%.

No real surprises when you tear it apart, though. I mean the commodities stayed low. Energy stayed low. Food is not an issue. It really continues to be those things having to do with labor and rent. Rent for primary residents and owners, rental equivalency are hugely weighted within the CPI, and they were both up over, I think one was 5.6, the other one was 6.1%, and that’s going to keep the CPI from going down all day long.

Auto insurance was up 20.9%. That’s not a big weight within the CPI, but it is an indication that people for whom insurance is a big deal making those payments, they’re getting squeezed on their discretionary income and hospital costs were up also in the latest month. Large labor component there and regulatory component. So the everyday person is still getting somewhat squeezed and the Federal Reserve, I think, is going to feel compelled to do something about that.

The PPI, producer price index, also came out and that made some big headlines. You probably saw a 1.6% rate of inflation on the finished goods component. Final Demand Finished Goods is how they address it. That’s on the seasonally adjusted data. We use not seasonally adjusted, and that was a more tolerable 1.1% increase on a year-over-year basis. But that’s still quite an increase from January, which was minus 0.8%. So we’ve lost our deflation and there again, it’s not because of hard goods. Commodities stayed weak. They were only up 0.3% on a year-over-year basis. Finished goods for consumers was up 0.6% so a little bit of an increase from the prior month, but it doesn’t indicate a surge in the CPI just yet.

And despite the name of Final Demand Finished Goods, that PPI that they talk about includes services and those services were up over 2%. It’s 2.3% from one year ago so it continues to be the service side of the economy. And we were just looking at GDP services deflated, not adjusted for inflation, and that trend continues to be relatively robust. So tells us we’re not likely going to see any appreciable weakening in that sector, at least for the first half of this year.

Retail sales also came in strong for February. From my perspective, a little surprisingly strong, the consumers proving themselves to be very resilient, even with the modest increase in unemployment and the pressures that we’re seeing on their discretionary income. The 112 moved up to 5.5% plus from one year ago. So retail sales for February up 5.5% from a year ago, 312 is in phase B and rising at 3.5%.

The only moderation we’re seeing here is that the seasonal decline in the data when you take January and February together is about average for the last 20 years. However, the January to February increase in the raw data and, again, we use not adjusted data is unusual. It is abnormal. It’s not without precedent by any means, but it is abnormal and it suggests ongoing consumer strength that really probably for the first half of this year we’d expect that to go on.

So all of that’s going to give the Federal Reserve some heartburn and probably put a stall on any decline in interest rates in their first half of this year. But working in on, though, and is important for a lot of our clients is that industrial production, the 12-month moving average declined in February. We saw manufacturing weaken further than it was with a minus 0.3% on the 12/12 rate-of-change. So that’s worse than overall industrial activity, which while the 12 MMA went down was up 0.1%, it’s in phase C.

Utilities, it’s helping to shore up the overall industrial production number and mining is also. Mining is showing a 3.6% rate of growth year-over-year, and it’s 12 rate of change, but it’s in phase C. So overall industrial production is going to continue to slug downward. The 12-month moving average looks like it’s done rising for this cycle pretty much. And manufacturing continues to be a weak spot on the broader economic scheme, but it’s not likely to be enough to cause the Federal Reserve to not look at all these other factors. So I think that the odds of decline in May have lessened, and that’s a change from last week based on the strength of this data.

Thanks for watching this special edition from the Ides of March on Fed Watch. We’ll see you next week.