A Stubborn Inflation Fails to Faze the Markets

Peter's Market Rap for the Week Ending March 1, 2024

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A Stubborn Inflation Fails to Faze the Markets

Hi. I am Peter Navarro with this week’s market wrap for the week ending March 1, 2024.

The S&P 500 had another up week, breaching 5,100.  Propelled by the AI revolution, nothing seems to faze this market, even bad news on the inflation front.

The biggest news came out on Thursday when the Federal Reserve’s favorite gauge of inflation, the Personal Consumption Expenditures index came out at its fastest pace in four months. The PCE index rose 0.3%, above expectations. The more important core PCE rate – at least when it comes to the Fed setting interest rates –strips out food and energy prices.  It rose even faster at 0.4%, marking the largest increase in a year.

Lightning quick digression: Economists usually strip out food and energy prices on the assumption of volatility and that usually such prices fall back down. Not such a great assumption when you are on a low income trying to buy gas to get the work food for your family, but that is the skinny.

This spike in the PCE was not a particularly big surprise so there was not much of a market reaction. Both consumer and wholesale prices that feed into the PCE index were up sharply last month.

But the big overriding debate here is about how quickly the Federal Reserve might begin to start cutting interest rates – the Fed’s benchmark short-term interest rate still stands at its recent peak of 5.5%.

Right now, a majority of market sentiment has the Fed rate cutting bonanza starting in June, with another two rate cuts likely by the end of the year. Yet, if inflation remains persistent, do not bet on that.  Said New York Fed President John Williams: “We still have a ways to go on the journey to sustained 2% inflation.”  Ya think?

In  not unrelated news, this week’s report on home prices showed prices up in more than half of the biggest 20 metropolitan areas in the country. Even as demand has been suppressed by higher mortgage rates – mortgage rates rose to a six-week high at the end of January -- the lack of housing supply is to blame for these persistently upward moving home prices.

Particularly if you are millennial thinking about trying to get into your first home, this home price trajectory is frightening. Just tin he last 12 months alone, prices rose about 6% in 20 major US metropolitan areas. My old stomping ground of San Diego posted the biggest hike at almost 9%. Where home prices go, rent prices must inevitably follow.

My biggest laugh of the week was when Elon musk sued the leader of the artificial intelligence revolution OpenAI for putting profits over people in a breach of the original vision of the company

Memo to Elon: when you bring back your Tesla production from Shanghai, I will believe you are more concerned about humanity and blue-collar American workers and profits.

As the back story, OpenAI’s founder and director Sam Altman had recruited Musk, or at least Elon’s money, to join the company in 2015.  Musk insists that at that time he entered into a “founding agreement” that clearly stipulated the company would indeed exist for the “benefit of humanity.”

Musk bailed on the company 2018 and now is actively pursuing his own AI venture – it’s unclear whether Musk’s own AI star ship seeks profits either directly or indirectly by funneling AI capabilities into other Musk ventures like Tesla and SpaceX.  If so, the cynical interpretation of this seemingly White Night lawsuit is that Elon musk is simply trying to use lawfare and the court system to slow down Microsoft, which is using OpenAI’s engines, to spring ahead of the competition. Stay tuned.

Finally, two economic indicators reports are well worth noting.  After six months of an upward trajectory, consumer confidence fell to 106.7. It was a wild miss to the downside as economists had the gauge hitting 115.

Teaching point: economists pay attention to consumer confidence because when confidence starts to fall, consumers will reduce their spending and this will ripple through to slower growth.

In addition, the trade deficit spiked. While Wall Street likes to tout whenever exports increase, the reality is that the trade deficit represents a subtraction, rather than addition, from US growth. The more we are able to produce in America, the stronger and more resilient our economy should be.

All right, that’s it for this week. Watch your wallet and your back.

Peter Navarro. Out!

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