Judging by the surge in commodity prices, led by gold, it’s all over bar the shouting – inflation has been defeated, the Fed’s on the cusp of slowing or even reversing its tight monetary policy and the sky will soon be filled once more with dollar bills.
Gold is back over $US1,900 an ounce – an 8 month higher, copper is well over $US4 a pound and at eight-month highs as well, iron ore is back over $US120 a tonne for the first time in 9 months, US bond yields are down to around 3.4%, the US dollar is down, the Aussie dollar is eyeing 70 cents US as a result – ‘hallelujah, we’re saved,’ the investors sing.
Well… not quite.
Yes, US consumer price inflation eased 0.1% in November because of a sharp fall in petrol prices as oil and gas prices slid to levels set before the Russian invasion of Ukraine 11 months ago.
Coal prices, especially thermal coal prices, have fallen along with LNG prices thanks to rising production and weakening demand caused by a warm northern winter.
(But US egg prices were up 59% in 2022 – have America’s chooks gone on a laying strike? At that rate eggs will be as valuable as gold!)
While gold and other commodity prices are rising, the jump is based on the hope that the slowing inflation and weakening greenback become the trend in 2023, not just a one-off.
Other commodity prices (but not energy like oil and coal and gas) have jumped in early 2023 on the China re-opening story which is misleading because Chinese commodity demand has not been ‘closed’ during Covid.
A sustained recovery in China’s stricken property sector will be far more positive for commodities than the Covid re-opening tale.
Chinese inflation remains weak – 1.8% in the year to December because of Covid but up slightly from the 1.6% annual rate in November – but analysts are looking for it to recover once the Lunar New Year break is over. Commodity prices have also risen because of the usual pre-ordering of imports ahead of the week-long break.
Next week there’s the 4th quarter GDP – a small positive reading is forecast; around 1.5%.
The catalyst for the excitement in markets on Thursday and Friday was the December US consumer price index which showed a slowing to an annual rate of 6.5%.
That was the weakest pace since October 2021 and down from 7.1% in November and well under June’s peak of 9.1%.
The core reading for the CPI (with volatiles like energy and food stripped out) was a high 5.7% in December. That was up 0.3% in December while the CPI fell 0.1%.
That would be a worry to the Fed because the core reading is the figure the Fed watches closely, along with the personal consumption expenditure rate (which will be out in late January).
“The downshift in inflation pressures is becoming entrenched, setting the stage for another reduction in the pace of rate hikes” in February, according to a Morgan Stanley note.
While the central bank raised the median rate outlook for 2023 at the end of last year, “we continue to expect only one final (25 basis-point) rate hike before a pause and an eventual first rate cut in December,” Chief US Economist Ellen Zentner said in the note reported by Reuters.
“Inflation is on its back heels,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s moderating steadily and, at this point, quickly.”
“I don’t think people will be talking about inflation this time next year,” Zandi added. “It just won’t be at the top of their agenda when thinking about their own finances.”
The probability of a 25 basis-point increase in the Fed funds rate jumped to 92% on Thursday from almost 77% on Wednesday, according to futures markets have made that bet a couple of times in late 2022 only to be wrong-footed by subsequent rises.
“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed,” Philadelphia Federal Reserve Bank President Patrick Harker said Thursday. “In my view, hikes of 25 basis points will be appropriate going forward.”
Investors seem to have forgotten the sceptical comments in the minutes of the December Fed meeting which were released earlier this month.
The minutes underscored that a slowdown in the Fed’s rate hikes — from four three-quarter point hikes in a row to a half-point increase in December — “was not an indication of any weakening” in the bank’s resolve to bring inflation back down to the 2% target.
Nor did the smaller increase signal “a judgment that inflation was already on a persistent downward path,” the minutes said. Instead, the risks remained that inflation could stay higher than expected and interest rates remain higher for longer, as the dot plot released at the meeting confirmed.
That message reflected concern that Wall Street traders were too optimistic that the Fed would soon suspend its rate hikes and even cut them later this year. Such a “misperception,” the minutes indicated, would complicate the Fed’s drive to lower inflation. This would occur if bullish traders sent stocks up and bond yields down, which would counter the Fed’s efforts to cool the economy.
Overall, the minutes showed that Fed officials remained determined to keep rates high to control inflation and saw little comfort from inflation’s decline from a peak of 9.1% in June to 7.1% in November.
Last Friday’s release of the December jobs report – the final one for 2022 – saw the optimists again setting the sentiment.
The data for December showed the US economy created 223,000 new jobs last more than forecasts around 200,000, while the unemployment rate fell to 3.5%, 0.2 percentage point below the expectations
The job growth marked a small slowing from the 256,000 gain in November, which was revised down 7,000 from the initial estimate.
Nearly 165 million people were either in jobs or looking for them last month, a record high. That saw 4.5 million new jobs created in 2022 (an average monthly gain of 375,000), understandably lower than the 6.7 million rise in 2021 (an average monthly gain of 562,000).
That should have been seen as confirming the Fed’s hawkish stance but a sharp slowing in the hourly wage growth provided a boost (after a blip in November sparked fears of a ‘wage price spiral’)
Wage growth was less than expected, which was seen as a sign that inflation pressures could be weakening. Average hourly earnings rose 0.3% for the month and annual growth slowed to 4.6% and lower than the forecast 5%. The annual rate in December was one percentage point slower than the 5.6% peak mid-year.
Average weekly earnings were up just 3.1% (it’s a broader measure)
The readings showed the slowest wage growth for more than a year – since September, 2021 and as a result December saw another month of falling real wages in the US which is the big message for 2023 from the labour force data.
Despite an expected rise in 4th quarter economic growth, the Fed’s seven rate rises in 2022 can’t not have a growing negative impact in coming months, especially if there’s an 8th rate rise at the end of January meeting of the central bank, its first for 2023.
Before then we also get the first reading of US 4th quarter economic growth with some forecasts around 3.8% to 4% (annual). That would be the strongest for some while and if it is confirmed, then it will be a case of ‘rate rise’ certain.
Remember the hard-line message in the Fed’s December minutes and those post-meeting comments from chair Jay Powell, who acknowledged that while inflation had been subdued in October and November, the central bank required “substantially more evidence” of declining inflation for the Fed to pause its rate hikes.
“We have a long way to go,” Powell said, “to get to price stability.”
