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About: The Beige Page, published every six weeks, is a distillation and analysis of the macroeconomic trends that are shaping the opinions of central bankers and moving markets.
Consumers, Why So Demanding?
Fed policymakers are closely tuned into consumer expectation measurements as they consider a future direction for their interest rate policy. Though consumer expectations of future inflation levels seem to be inching downward and closer toward the Fed’s 2% target, several recent data points signal a continuation of the strong demand underlying US inflation pressures.
US retail sales rose 0.7% in March from a month earlier, beating consensus expectations. Retail sales have now risen in seven of the past ten months, and several key categories have moved upward, including a 2.7% increase in online sales and a 2.1% increase at gas stations.
Meanwhile, hiring remained strong in March, with 303k jobs added and little movement in the unemployment rate, which stands at 3.8%.
More recently, the Federal Reserve’s April 19th release of its Beige Book Summary showed that nationwide economic activity has expanded slightly over the past six weeks. However, performance has varied by region. 10 of 12 Fed districts reported slight or modest increases in economic growth, up from 8 in the last round of reporting.
The anecdotal data from the Beige Book displays similar mixed signals. Several districts reported declining discretionary spending as consumers remain increasingly price-sensitive to several goods categories. However, some districts saw a notable rise in auto sales, while others experienced a modest increase in tourism as Spring began.
On Talk of Rate Cuts, Powell is Fed Up
During a press conference on April 16th, Fed Chair Jerome Powell signaled that the much-expected 2024 rate cuts will likely be delayed. After claiming in a March 7th speech that gaining such confidence was “not far” off, Powell’s recent comments are a notable hawkish turn. The Fed chair stated that recent data had “clearly not given us greater confidence” that inflation is coming under control.
The recent data that Powell speaks of almost certainly points to the March CPI data released less than a week before his comments. Headline inflation rose by 0.4% between February and March, beating the Dow Jones consensus forecast of 0.3%.
Core CPI, which excludes food and energy components, mirrored the increase in headline CPI. Notably, the Fed prefers Core inflation measures, which are less volatile and have lower sensitivities to supply-side disruptions that are beyond the Central Bank’s purview. Shelter costs again surfaced as the most significant contributor to price pressures, also rising by 0.4% on the month.
However, are shelter cost measurements sending false signals? A long-debated flaw in how the CPI and PCE inflation indexes calculate their shelter components, which utilizes a concept called “owners’ equivalent rent,” appears to be a critical factor in the persistent elevation of both measurements. Could this be distorting how markets view and act on recent inflation data?
Oil Shock and Awe?
In a recent Chandan Economics blog post, we detailed how a protracted and escalating conflict in the Middle East is deepening market uncertainty and has elevated into the most significant contributor to global risks.
According to Blackrock’s global risk indicator, Gulf tensions now outpace both US-China competition and cyber-attack risks as the most significant threats to global stability.
Following the October 7th attacks in Israel and the subsequent war in Gaza, Blackrock’s risk indicator has hovered around a two-year high. Although the metric has not reached as high of a level as following Russia’s initial invasion of Ukraine, it has remained elevated for longer as tensions seemingly escalate.
Like in reaction to the Russia-Ukraine War, the energy market has become the most vulnerable segment of the global economy in the face of the recent Middle East crisis. As Israel and Iran inched closer to a direct conflict at the beginning of April, US crude oil prices reached as high as $87 per barrel and have remained elevated in the weeks since.
Oil prices have at least stabilized in recent days as rhetoric between the nations involved has appeared to cool. However, it is not far-fetched to say that the environment in the Middle East remains highly volatile, which will keep the degree of market uncertainty elevated.