Today, the government announced some economic data that tells us what we might expect from the economy and the Fed in the months ahead.
The government reported a sharper drop in producer prices of 0.5% when economists expected a 0.1% drop. This is good news on the inflation front and may suggest the Fed might slow down interest rate increases and perhaps asset sales.
Year over year, the PPI is up 6.5%. The significant contributor to the fall in producer prices is the 13.4% drop in wholesale gasoline prices and the 7.9% drop in energy prices in general.
In previous months, such low numbers would spark a tremendous bond and stock market rally. Bond yields fell by 11 basis points, which is consistent with lower price inflation. But stocks are only up a little bit in pre-market trading.
So why was the move muted, at least in the premarket? We think it has to do with retail sales, which were down 1.1%. Wage increases have lagged behind the price inflation numbers, meaning people are losing purchasing power. This has been going on for a few years now. People have problems paying their bills and have to cut back. This phenomenon is showing up in the saving numbers.
The chart above shows the saving rate from 1960, which is all the available data. It shows that the savings rate in the US is at an all-time low. The average person has nothing left over at the end of the month. Lower-income people are probably borrowing or dipping into their small savings to make ends meet. Only high earners are saving at the moment. This is the first sign of a recession. This could be why stock prices are only up a little bit.
An alternative explanation is that the stock market rally for the last six weeks is built on the expectation of slower inflation and, therefore, a slowdown or perhaps a halt in interest rates increases. We now think the markets have moved into a new regime where the prospect of a Fed pivot and slower economic growth are battling for dominance in investor minds.
Or perhaps this is all buy the rumor, sell the fact.
From a technical perspective, we think the above chart summarizes where the equity market resides at the moment. Prices have been falling since the beginning of 2022. But stock prices mustered a decent counter-trend rally that started in October 2022. The trend lines describing the action of the bulls and the bears are coming to a crescendo. Our thesis is that the bears will win because we believe a one-year bear market is not enough to wash out 12 years of monetary mischief, $6 trillion of money printing over the past two years, and now $2 trillion in federal government budget deficits for as far as the eye can see. Someone has to pick up the tab for the free lunch.
Photo by Anamul Rezwan: https://www.pexels.com/photo/two-man-holding-white-paper-1216589
