The last few weeks we’ve focused on company news and stories other than those that are economic in nature. This week we return to the economic data as there were two large events that will likely foreshadow markets going into the second half of the year. The first is the inflation data which came out on Tuesday, and the second was the FOMC decision on interest rates which occurred Wednesday. If you want the executive summary, the markets reacted better than might have been expected and all three major indexes look to close higher, for the fifth consecutive week.
Let’s dig into the inflation data as it likely had a big role in the Fed’s decision to skip an interest rate hike this week. The good news is that inflation continues to decline. Just one year ago CPI was 9.1%, compared to the 4.0% reported this week and even the 4.9% reported in April. That’s no small feat and the Federal Reserve should be very happy with the progress it made in bringing inflation under control. It should be noted that a big component of this is energy which has, to a large degree, been responsible for the steep decline more recently. Core CPI, which excludes food and energy, eased only slightly from April, falling from 5.5% to 5.3%. The major variable in Core CPI is shelter, which I have noted repeatedly, is a very sticky expense, especially in light of the lack of housing supply. Aside from shelter, the other components that rose are used car prices and motor vehicle insurance. Talk about timely. I wrote about auto insurance just last week!
With this data in hand, the FOMC decided to “skip” hiking rates this month while it assesses the economic data and gives the economy another month to show its hand. It should be noted that the Fed, more precisely Jerome Powell, is loath to say it's done raising rates. In fact, in his press conference he said that it is likely there will be two more interest rate hikes in the second half of the year. Ordinarily, one would expect the markets to fall on this news considering he’s saying he wants to slow the economy down further or perhaps faster. Yet, investors appeared to shrug off the news, perhaps not believing the Fed will follow through with its statement. Some analysts mentioned talk is cheap, and suggested Mr. Powell is trying to jawbone the markets into submission while knowing the Fed won’t actually follow through on further rate hikes. While I don’t expect rates will fall this year, it is likely they will stay elevated for longer than we anticipated. For now, the markets seem to be calling the Fed’s bluff.
As for the economy, and more specifically consumption which makes up 60% of GDP, it seems nothing is causing consumers to slow spending. A mountain of credit card debt is piling up as Americans turn to plastic to counter their dwindling purchasing power. According to the Federal Reserve Bank of New York, consumers now owe a record $988 billion on their credit cards, up 17% from a year earlier. In a nutshell, high inflation is pushing consumers to put non-discretionary spending on cards, while others may be having a harder time paying back their lifestyles despite the price pressures. Interest rates are compounding the issue, with the average annual percentage rate (for credit cards) now over 20%, making it a costly debt for consumers. While economists have predicted a recession for over a year, it has not yet appeared, in part due to consumer spending. One is left wondering what will happen when student loan payments start back up again this fall and could account for an economic headwind between $60B and $200B per year.
In closing, we learned this week that Instant Pot has filed for Chapter 11 bankruptcy, hoping to restructure its debts and remain a going concern. I must admit, while I don’t own one, I’ve always wondered what I was missing by not owning this Swiss Army knife of kitchen appliances. The stews I could be making and the quick dinners I could be preparing. The device exploded in popularity in 2016 and in 2019 was acquired by a private equity firm, Cornell Capital, which planned on growing the brand in different directions. Then the pandemic struck and people suddenly had more time to cook, not pressed for time like they had been before the pandemic. Between new product flops and a sudden lack of demand, the company found itself in financial difficulty. As one person said, “fly too close to the broiler, and you’re going to get burnt.” Now you know.Bruce J. Mason, MBA