The Fed's New Key Inflation Rate Cooled In November; S&P 500 Wavers

The Federal Reserve's main measure of inflation cooled in November, though the stock market rose.

Core inflation, which is closely monitored by the Federal Reserve, eased a little more in November than was expected. Jerome Powell, Fed chief, has recently focused on a "most important" rate of inflation to support rate increases: PCE Services less Housing. This rate fell to 4.3% in November. S&P 500 climbed slightly after the report on personal consumption expenditures, reversing some of its early losses.

PCE (personal Consumption Expenditures) Price Index rose by 0.1% in the last month. PCE inflation rates continue to decline from the 40-year high reached in June of 7% to 5.5%. Core prices minus energy and food rose by 0.2% in the month, as the core inflation rate fell to 4.7%.

Wall Street expected a 0.2% rise in the PCE Price Index and a further 0.2% with a 5.5% overall inflation rate and a 4.6% core rate.

Powell's preferred new inflation rate is the one that poses the greatest problem for the S&P 500. The index factors out the rapidly declining goods inflation. The housing inflation is also excluded, as the government data will catch up with the slowing market rent growth in 2023.

This leaves core services such as education, health care, hospitality, and haircuts. Powell explained that because the price changes of these services are closely related to wage growth they give the best indication as to where core inflation will be heading.

This statistic is so recent that it's not included in the Commerce Department report or Wall Street's estimates. IBD calculations indicate that the PCE services price index minus housing and electricity rose by 0.3% in the past month, and 4.3% over the previous year. This is down from the upwardly revised increase of 4.7% for October.

Transport services fell by 2.1% in October but were still 11.8% higher than the previous year. The monthly increase in health care services was only 0.2%.

The Fed's new inflation rate, which is the key to the S&P 500's performance, doesn't do much for the S&P 500 as it focuses on the most important part of the economy - the tight labor market. The Fed's benchmark interest rate may be raised higher than expected by the markets until the job market cracks.

Stock market activity on Friday morning was boosted by a 0.2%2 increase in the S&P 500 after the PCE report. The Dow Jones Industrial Average rose by 0.2% while the Nasdaq Composite lost 0.2%.

Since the Fed's half point rate hike, and its projections of further tightening in the range 5%-5.25 % by 2023, the S&P 500 has been under pressure. Concerns about Fed tightening are exacerbated by worries about earnings and China's Covid disaster. The bond market does not seem to be buying the Fed's guidance. Markets were pricing a peak interest rate of between 4.75% and 5% as of Friday morning.

The S&P 500 has lost 20.3% since its record high closing on January 4. The S&P 500 is still 6.9% higher than its 52-week low closing price, but the index has dropped below its 50-day and 200-day moving averges.

The yield on the 10-year Treasury note rose by 6 basis points, to 3.75%.

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