In comments on the market, Daniel Berkowitz, investment director for investment manager Prudent Management Associates wrote:
A Soft PCE Inflation Report
PCE inflation and consumer spending data are buoying investors’ sentiment today, with stocks trading up after a relatively soft report. Notably, core PCE edged down both on a month-over-month and a year-over-year basis.
Any short-term relief showing up in inflation data is welcome news, but this report is by no means cause to celebrate. Core PCE has been essentially range-bound since last December, and this is a very important metric for the Fed as it calibrates its monetary policy stance.
Taken together with recent data showing continued strength in the labor market, we’re guessing Chairman Powell would still agree with his statement from earlier this year that there’s “more work to do” on inflation.
Even with layoff announcements streaming across headlines, the US labor market is powering ahead. Jobless claims edged up last week, though the labor market still remains very tight—claims have actually been sitting below the 2019 pre-pandemic average over the last few months.
Cracks In The Labor Market
This isn’t great news for the Fed, which is likely hoping to see slightly larger cracks emerge in the labor market.
A weaker jobs market should trigger slowing wage growth and a more significant pullback in consumer spending, which would ultimately nudge down key services-related inflation metrics that the Fed is scrutinizing. In turn, this would provide the Fed with wiggle room to focus more on dealing with any further fallout from the recent banking crisis.
On the banking front, no news is most certainly good news these days. Odds are that we don’t see further bank failures given the strength of government and Fed intervention, though with that said, regional banks are still looking at dark skies ahead.
Coupled with what is likely to be a stricter regulatory environment in some form, pressure to increase deposit rates to stem further outflows will weaken their economic position. Looming stress in the commercial real estate market, particularly for office buildings, where these banks hold an outsize share of debt won’t help.
The ultimate impact will be a reduction in lending across the board, which may disproportionately affect the local communities that many of these banks serve. While that should help bring down inflation over the coming months, it’s not great for the long-term health of the US economy.
Prudent’s core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.