Leland Abrams, who serves as Chief Investment Officer for the investment manager Wynkoop LLC and a portfolio manager of a fixed income fund at Catalyst, provides his analysis of the release of economic data on July 28, 2023:
Today’s much anticipated release of economic data including the Employment Cost Index (ECI) and the Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) all painted the picture of a goldilocks scenario. Inflation is abating, wages and labor market conditions are cooling, while the economy continues to grow, and spending remains resilient.
The ECI came in at 1.0%, lower than expectations and 2/10s lower than last month’s print. Personal income came in at 0.3%, lower than the 0.5% expectation and lower than last month’s revised 0.5% print.
On the inflation front, the MoM and YoY PCE numbers both show good progress on inflation. The month-on-month change on core PCE came in rounded up to 0.2% (the actual number was lower; 0.165%), while the YoY headline fell to 3.0% and core to 4.1% (the lowest in almost two years). Annualizing this core monthly number gets us to that approximate 2% core target.
Yesterday, bonds sold off around 1 p.m. after a weak 7yr treasury auction, but more importantly, following the release from the Bank of Japan (BOJ) regarding their yield curve control. The bond market fears rising interest rates in Japan, which would impede the carry trade so many investors have been using with free money from Japan.
After today’s data release, yields fell and bonds rose in price. The market is pricing in an approximate 30% chance of another Fed hike by November, which would be the last. According to the Fed, they have not made up their mind yet about the next meeting, so if inflation continues on this trajectory, it is possible Wednesday’s 25 bp hike in Fed funds could be the last.