As the Detroit Lions’ fans learned on Sunday, it’s foolish to celebrate at halftime.
The stock market’s inflation hawks may be guilty of the same offense. Let me explain…
The FOMC’s favorite inflation indicator is the Personal Consumption Expenditures Index (PCE). This is one of the main data points – perhaps THE main data point – the Fed uses to determine monetary policy and decide whether to raise or lower interest rates.
For the past year, the Fed has aggressively raised rates, intending to bring the annual inflation rate down to its 2% target. And, based on the December PCE report released last Friday, the Fed has accomplished its mission.
The report showed that the monthly inflation rate for December was 0.2% – in line with expectations. Year over year, the report showed an increase of 2.6%.
While that’s still above the Fed’s target rate, it was close enough that inflation hawks felt justified in doing a touchdown dance.
Former Chicago Fed President Chuck Evans was quick to point out that if we take results over the past three months and annualize them, then the PCE inflation rate is just 1.5%. If we annualize the past six months, we’re looking at 1.9%.
Mission accomplished!
Of course, if you eat, use electricity, live indoors, or drive a car, it doesn’t feel that way. But why quibble? The government says the inflation rate is falling. So, we might as well believe it.
The problem, though, is the PCE for January is likely to rise. And the price trend for the next few months looks higher as well.
Look at this chart of the Invesco DB Agriculture Fund (DBA)…
DBA reflects price changes in the agricultural sector.
The fund declined 4.4% between early November and early January. That’s in line with the declining PCE Index.
But look at what’s happened over the past two weeks. DBA has recovered its entire decline. It is trading at an all-time high price level. And it’s on the verge of breaking above a resistance level that it has challenged three previous times.
This is a bullish-looking chart. If DBA can break decisively above $21.50, then it could surge higher – fast.
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That’s bad news for anyone trying to keep inflation under control. And it reduces the chances of the Fed lowering interest rates anytime soon.
At the moment, the Fed funds futures are showing a 50% chance of a rate cut as soon as March. The chance of a May rate cut is at 80%.
But, if DBA continues higher from here, then the odds of a rate cut have to go down. So, too, will the hopes of the inflation hawks, who may have prematurely started their celebration.
Best regards and good trading,
Jeff Clark
Editor, Market Minute