The week in review
- Core wholesale prices (PPI) rose 0.4%, above cons. 0.2%
- Prelim consumer sentiment recovered to 59.1 from 56.8
- ISM Services PMI jumped to 56.5 from 54.4
The week ahead
- CPI
- Retail Sales
- December FOMC Meeting
Thought of the week
This week, investors will gain further clarity on whether the recent inflation downtrend is sticking and the Fed’s timing on a policy pivot. The November CPI report will be out on Tuesday and market expectations are for a 0.3% increase in both the headline and core measures, which would bring the year-over-year inflation rates to 7.3% and 6.1%, respectively. We expect core goods inflation will continue its decline given further contraction in the Manheim used vehicle index, softening consumer spending on durable goods, easing supply chain constraints and retail discounting during the holiday season. Lower gas and oil prices will also help drive moderation in the headline measure. However, Powell has highlighted services inflation excluding rent as a key inflation measure for the Fed. While this measure turned negative in October, breaking a long streak of monthly increases, its pathway to normalization will be primarily determined by labor market dynamics. The November jobs report showed a mixed picture of labor market tightness, with hotter-than-expected wages but weakness in the household survey. However, other highfrequency data suggest the labor market is still cooling, with initial jobless claims and layoff announcements rising in recent weeks. While the labor market is typically the last to turn in an economic cycle, we expect data will soon reflect this softness and signal further moderation in services inflation. On Wednesday, the Federal Reserve will conclude its last meeting of the year and we expect they will still slow their pace of rate hikes to 50bps. While they will likely maintain higher-for-longer policy messaging, economic normalization and receding inflation pressures should allow them to pause their tightening program in the first quarter.
