Economic data came in a little hotter than anticipated during February, dashing investors hopes for a 2023 pivot from the Federal Reserve. Inflation is proving stickier than many had forecast, and the FOMC is now seen having to push short-term interest rates to near 6% by year-end. The data around employment and inflation remain particularly robust, defying earlier Fed predictions that we should see a softening in economic conditions in Q1.
Nonfarm payrolls surged by +517k in January, far exceeding analyst predictions for a +189k rise. The Unemployment Rate fell to 3.4%, down from the prior month’s reading of 3.5%. Average Hourly Earnings edged up +0.3% MoM, and YoY have risen +4.4%, a slight decline from the prior month’s reading of +4.8%. The Labor Force Participation Rate edged up slightly to 62.4%, while Initial Jobless Claims remained below 200k per week. The JOLTS Job Openings number for December came in much stronger than expected at +11mm, signaling continued high demand for labor.
On the inflation front, Consumer Prices rose +0.4% in January, while Core CPI edged up +0.4% MoM. This translates to a +6.4% YoY rise in broad consumer prices and a +5.6% YoY jump ex-food and energy. On the wholesale front, producer prices surged +0.7%, while Core PPI rose +0.5%. Annually, this is a +6.0% gain in PPI and a +5.4% rise stripping out food and energy. The Fed’s preferred inflation gauge, the PCE Deflator rose a higher than forecast +0.6% on the month for a +5.4% YoY increase. Inflationary pressures remain with us across the economy and show little sign of abating anytime soon.
A combination of higher mortgage rates and inclement weather across the country has no doubt influenced home sales thus far in 2023. With 15 and 30-year borrowing rates above 6%, demand for existing homes has waned (-0.7% MoM in January) as current mortgage holders are reluctant to swap 3% loans for 6%. New Home Sales did spike in January, up +7.2% from the prior month, while Pending Home Sales surged +8.1%, no doubt driven by the still strong labor market. The S&P CoreLogic CS 20-City home price composite did dip -0.51% in December, although home prices remain up +4.65% YoY.
The Fed will need to remain vigilant in its efforts to bring inflation under control and return to the 2% target rate. Current forecasts suggest a Fed Funds rate of nearly 5.5% later this year, data dependent of course. Fears of a hard landing would appear overblown at this point, given low unemployment and strong labor demand. Now being floated is the idea of a “no landing” economy – a continuation of slow but steady growth in the US economy. Current data would seem to be reinforcing that notion.
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