Revised fourth quarter GDP was largely viewed as a nonevent. Growth was nominally lower than expected given the downward revision in inventories. Consumer and investment spending however was nominally higher than previously reported. The inflation indices were also revised insignificantly higher.
Today is the release of the monthly PCE deflator or the Federal Reserve’s preferred measure of inflation. The increase in the monthly data is expected to be the greatest in a year.
As noted several times, after a sharp decline from around 9%, inflation has remained stuck in a tight range for the past 12 months. Depending upon the statistic picked, inflation is between 3% and 4%, primarily the result of service inflation which includes a wage component.
Cost push inflation (wage) and OER have been the primary drivers of this stubborn inflation. Neither of the two components are likely to drop in the intermediate future for a number of reasons including significant union gains and the dearth of residential building.
The Fed Funds futures market has now repriced and is only suggesting 75 bps of reduction by year’s end, about the same as the Federal Reserve’s outlook.
Against the above backdrop, the data might be a non-event given the repricing has already occurred. The obvious question to ask is what will be the market’s reaction if the data surprises in either direction?
The velocity of change is frightening, a velocity that is perhaps the result of the lack of liquidity and markets dominated by algorithmic trading that only cares about where prices may be in five minutes versus five months.
Markets were again quiet yesterday ahead of this potentially significant data point.
Last night the foreign markets were mixed. London was up 0.28%, Paris down 0.01% and Frankfurt up 0.47%. China was up 1.94%, Japan down 0.11% and Hang Seng down 0.15%.
Futures are down about 0.25% ahead of the data, a data point that few had followed until several months ago when the Fed stated all monetary policy decisions will be dictated by the statistics. The 10-year is off 10/32 to yield 4.31%.
