U.S. Economics – Inflation and Monetary Policy

Inflation and Monetary Policy

The Signals:

• ISM PMI Prices (Chart 1)
  • These sentiment indicators survey business activity across several industries in the manufacturing and services space.
  • Survey respondents are asked whether a given measure was better or worse (or higher or lower) compared to the prior month with a reading above 50 indicating expansion and a reading below 50 indicating contraction.
    • Manufacturing prices increased to 52.5 from 50.4, its third consecutive month in expansion territory.
    • Services prices increased to 64.4 from 58.2, its highest level since February 2022 and above its twenty-year 70^th percentile line.

• Redbook Weekly Retail Sales (Chart 2)
  • This is a measure of nominal retail sales growth, meaning it includes growth coming from changes in volume and price.
    • Same-store retail sales growth accelerated from 4.2% y/y in the first week of December to a high of 7.1% during the month against increasingly difficult comparisons.

• WTI Crude Oil (Chart 3)
  • Daily commodity prices, like Oil, can help us gauge the likely direction of headline inflation measures for the monthly reporting period.
    • The spot price for WTI Crude Oil increased from $68.00 at the end of November to $71.72 by December 31^st, representing a 5.5% increase during the month.
    • On a y/y basis, the end-of-month average price for December came in at -3.4%, a rate of change acceleration from -10.1% in November, raising the probability that energy components of inflation data will be less of a drag on y/y growth.

• Fed Funds Futures (Chart 4)
  • Monitoring the Fed Funds futures market provides a signal on how investors are positioning for FOMC rate cuts at each upcoming meeting.
  • We track when the first rate cut is expected by meeting date and the implied rate change.
    • As of yesterday, the futures market was pricing in a 25-basis point rate cut at either the June or July meeting with just 38 basis points of rate cuts by December 2025, meaning they expect less than the FOMC projection of two rate cuts to occur in 2025.

The Takeaway:

• Inflation has progressed in the direction we expected through year-end and that trend is likely to continue into the first quarter given the trajectory of market-based signals we monitor.
• Positive growth data and above target inflation could push expectations for the amount of rate cuts lower in 2025 and the pace of potential cuts further out into the future.

Visuals:

(Chart 1)

(Chart 2)

(Chart 3)

Source: Macrobond

(Chart 4)

Source: Bloomberg

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.