KEY DATA: Confidence: -1.4 points; Expectations: -4.6 points/ Phila Fed (NonMan.): -33.5 points/ Case-Shiller Home Prices: +0.9%; Over-Year: 18.8%/ FHFA: +1.1%; Over-Year: +17.5%
IN A NUTSHELL: “With problems domestically and internationally, it is no surprise that households are getting concerned about the future.”
WHAT IT MEANS: Let’s see now: The Fed is planning on raising interest rates, consumer and business costs continue to surge, and the equity markets are moving into correction range. Oh, and there is Putin thinking we are still in the midst of the Cold War, with a potential hot war thrown in for good measure. What me worry? I am beginning to wonder if my Alfred E. Neuman attitude should be revisited. And with the Fed starting its two-day FOMC meeting today, it will be interesting to see if the members start rethinking their views on policy. The data are not helping either.
The Conference Board’s Consumer Confidence fell modestly in January, but the details do contain a warning. The view on the present shape of the economy was up, which was somewhat of a surprise given the data have been hinting at a moderation in growth. But expectations dropped fairly sharply. This component can be susceptible to big ups and downs, especially when there are political issues involved. It that were the case, I would dismiss it. But the market correction could be giving people pause. I am not sure that a potential Russian invasion of Ukraine has entered the public’s psyche, and it could take an actual invasion and a forceful U.S. reaction before the confidence measures see any impact. The point is, the risk is to confidence is to the downside.
The big shocker of the day came from the Philadelphia Fed, whose NonManufacturing index plummeted into negative territory. This is a diffusion index and is notorious for its volatility, but the drop was larger than any other time over its eleven-year existence except in March and April of 2020, when the pandemic and shutdowns hit. That says something, though I am not sure exactly what. That’s because the details were weak but for the most part, didn’t point to an actual slowdown in activity. The new orders, sales and employment indices fell sharply, but remained positive. Increases in prices received and paid were more widespread and wage costs continued to accelerate sharply. Those are not indicators of a faltering economy.
On the housing front, another month of data, another round of sharp price increases. Yes, the year-over-year gains for both the Case-Shiller and Federal Housing Finance Agency price indices are trending downward, but the pace remained extraordinarily high in November. There are few indications that supply will increase enough in the near term to cause the price gains to decelerate sharply.
IMPLICATIONS: We are going to see if Chair Powell and the rest of the Fed’s Board of Governors and Regional Bank Presidents have backbones. The Fed has bowed to the markets for so long that several years ago I started referring to the Fed’s mandate as a triple one, not a dual one. Maintaining high and rising equity prices was the third component. With inflation remaining well above acceptable levels, even in an average rate over time policy world where higher than target price gains are tolerated, you would expect the Fed to stay the course on its appointed rounds of rate hikes. I expect that to be the case, but if the equity markets continue to falter, when we get to the March 15-26 meeting, I am not sure what the FOMC do. I was expecting a 50-basis point show of force in March, but that could be off the table. The markets may dictate what the Fed does once again, and if that happens, it is too bad. As I have noted before, the Fed has done everything but bash investors over the head with a sledgehammer to warn them that rate hikes are coming. That suddenly, everyone is worried about rate hikes proves another of my favorite sayings: “Markets may be efficient, but that doesn’t mean they are rational”. Although, failing to heed Fed warnings also brings into question the efficiency of markets. Basic information just doesn’t seem to spread easily. Instead, the friction of mob, or maybe lemming mentality appears to be keeping bad news from being distributed. Regardless, we have to see how much further the markets fall and how quickly they recover to get a handle on the impact on consumer confidence and Fed policy. Recent market corrections were reversed fairly quickly. Hopefully, that will be the case this time as well.