A commentary by John Kerschner, Head of US Securitized Product at Janus Henderson Investors, on this morning’s PCE print.
“The start of 2024 has largely been one of removing overly aggressive anticipate Fed cuts. Powell’s late 2023 dovishness, has been met with stubborn inflationary pressures, and a more resilient and stable US growth environment. Recent stronger than expected inflation prints have made the markets jittery as rates have hit 2024 highs and are exhibiting extreme volatility. The Fed is back to watching the “data” to inform their decision.”
“With that, every new inflation print has elevated importance, and the market was in need of an “in-line” print to confirm that the Fed wasn’t starting to lose this battle. The good news is that that US Core PCE, the Feds preferred measure of inflation, confirmed that inflation persistence is continuing but isn’t accelerating like some feared, as the number came in at 2.8% flat with last month’s print. The month over month measure also remained stable at 0.3%, similar to last month’s print. The hard fact is the Fed needs to see monthly prints averaging in the 0.15-0.2% range to get to their stated 2% target which at this point seems a little far off. Although inflation is still too high for the Feds comfort, if progress does continue, it still may be reasonable to assume 1, maybe 2, cuts in 2024. More specifically, service inflation excluding the more volatile housing and energy climbed 0.4% from last month, a slight acceleration from the prior month.”
“The solid employment picture, current US growth strength, and slowing but persistent inflation gives the team at Janus Henderson confidence that the Fed’s patience is the right approach. One important but lightly followed indicator is the Citi Economic Surprise index which measures data surprises relative to market expectations. This indicator has declined steadily over the past few months potentially indicating that a higher Fed Funds rate may be slowing the US macro data negatively. Whether it’s higher for longer or higher for now, investors should take advantage of these decade high yields, and like the Fed, continue to watch the data.”
John Kerschner
Head of US Securitized Product
Janus Henderson Investors
