The Rotation That Never Happened
The Pressure Of Rising Rates Continues
From an economic standpoint, we got two big numbers this week that pretty much tell us what we already know. The U.S. core PCE inflation rate, which is the Fed’s preferred inflation number, rose by 0.3% in May, as expected, which puts the annualized rate at 4.6%. The headline PCE rate fell to 3.8% year-over-year, which is the lowest it’s been in more than two years. High base effects rolling off of the 12-month measurement should ensure that these numbers come down a little further in the coming month or two, but the overall theme of “sticky and persistent” as it relates to inflation will continue for the foreseeable future. Personal spending also came in below expectations, but showing strength in services and weakness in goods. We’ve known this for a while as well since this has been a consistent pattern for months.
That means the Fed won’t be under any pressure to lower rates for at least another couple quarters, which is a good thing in case you want to keep locking in those 5% yields on T-bills because they’ll probably be sticking around for a while. On the flip side, it also essentially ensures that the Fed will keep running down its balance sheet and pull liquidity out of the economy. We’re already seeing this show up in a lack of new corporate investment and tighter credit conditions, so the impacts are being felt from a macro perspective even though they aren’t showing up in the GDP numbers.
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