US core personal consumption expenditures (PCE) rose 0.6% in January which confirmed that inflation is by no means defeated. In fact, Inflation is winning the war over the Fed.
This is the second month in a row that PCE rose and this is devastating to the Fed’s outlook after all the hard work already done in aggressively raising rates.
The through year number, which is apparently a favourite of the Fed, jumped to 4.7%. The market was expecting a much lower 4.3%, which would still have been of concern.
If all of this is not enough for the Fed to be panicking, remember the core number excludes gasoline prices which are clearly on the rise again and will eventually flow through to all goods and services prices.
The Fed is losing this battle and will have to take far more strident action than markets have envisaged.
My forecast remains unchanged at 5.75% to 6.5% for the Terminal Rate, with risk to 7.5%. More and more economists are beginning to recognise and forecast that an above 6% terminal rate for this Fed hiking cycle is a very real possibility. We knew it all along.
Our further risk scenario, that inflation is now so widespread, that there is already an upward prices/wages spiral in play, and that further gains in global oil prices will simply overwhelm any current Fed defences on the inflation flood plain, all point to the increasingly likely potential for this hiking cycle to persist throughout the year.
This means further melt down for US stocks, US property, a more significant economic slowing in general, and potentially yet another alarming and spectacular rally in the value of the US dollar.
While always on the lookout for signs that the overall demise and falling back into the global pack of the US economy will one day tip the US dollar into an historic re-pricing lower phase, that day may still be some time off.
For the moment, and certainly this is already being seen in the price action, the US dollar may only be in the early stages of yet another tear higher. It is the resilience, indeed the re-acceleration of inflation and its win over the Fed at these rate levels, that is and will continue to catch the market by surprise.
The view here remains, as it has since January 2022, to be defensive on stocks and property, while looking to buy a low in the US dollar. That low, has most probably now been seen on a medium term basis, as well as the obvious short term rally.
Any suggestion of a resurgent US economy at this stage is akin to a rave party about a single snowflake spotted somewhere in the Arizona desert. Momentary positive blips in a harsh landscape remain the view here as the Federal Reserve will be hiking rates for a very long time indeed.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
