Market 12/22: PCE continues downward trend, reinforcing confidence in Fed pivot

PCE growth continues to decline as Fed expected

Fed's preferred inflation gauge (PCE growth) is on track to decline as Fed expected:

• Headline PCE growth reaches +2.6% Y/Y in November, down from +2.9% previous and below expectations (2.8% Y/Y).

• Core PCE growth (Core PCE) - down to +3.2% YoY - lower than forecast (+3.3%) and the lowest since April 2021.

• Notably, monthly PCE growth fell -0.072% MoM - the first deflation since April 2020.

  • This decline comes entirely from the Goods component (durables and non-durables).

• 6-month average core PCE growth has reached Fed's 2% target

• Services inflation excluding housing spending has fallen from peak to lowest since March 2021.

• Goods spending growth continues negative for 6th straight month, while services spending remains high.

• Note that cyclical spending price components remain quite high (but on a downward trend).

PCE inflation slowdown further reinforces market confidence in upcoming Fed rate cuts:

• market bets 75% probability Fed will cut rates in March 2024 (and about 14.5% chance of cuts right from January).

  

However, notably, while spending growth is low, US household income growth this month is quite high (higher than M/M spending growth):

• Both income and spending rose in November, at +0.4% M/M and +0.2% M/M.

• This boosted Y/Y growth in income and spending respectively (+4.6% and +5.4% Y/Y) higher than previous month.

• Savings rate up from 4.0% to 4.1% in November.

• Private wages up 5.0% Y/Y, up from 4.1% in October — lowest in 3 years

• Government wages up 9.0% Y/Y — all-time high

US durable goods orders surge most in over 3 years

November durable consumer goods orders (durables) up +5.4% MoM — largest monthly gain since July 2020,

• equivalent to +10.1% Y/Y gain — highest since May 2022.

• While durable consumer goods orders increase mainly from parts and non-defense aircraft group (up +80.1% Y/Y).

• Defense items saw orders down -12% Y/Y.

• Core capital goods shipments (core capital goods), down for 2nd straight month, pulling YoY growth to +1.0% - lowest since Feb 2021.

Nike Q2 FY24 earnings update

• Revenue +1% Y/Y to 13.4 billion USD (beat estimates by 40 million USD)

  • Direct sales revenue +6% Y/Y to 5.7 billion USD

• EPS: 1.03 USD (beat estimates by 0.18 USD)

• Inventory -14% Y/Y to 8.0 billion USD

• Corporate restructuring costs: 0.4 billion USD

• FY24 revenue forecast +1% Y/Y

Nike shares plunge after the sportswear maker lowered its revenue forecast for fiscal year 2024.

Other news

1. Sugar prices have fallen 28% from the high on 11/07 and are now trading at the lowest level since early March

2. Global rice prices have risen to the highest level since 2008.

3. Container freight rates reach 10,000 USD as ocean freight inflation surges amid the Red Sea crisis.

4. China's renminbi accounted for 4.6% of international payment transactions in November - the highest rate in history. This figure was less than 0.1% in 2010.

5. IMF data shows that the share of the USD in global central bank reserves has declined over the three months ending late September, while the share of Japanese yen holdings has increased.

   • The greenback accounts for 59.2% of global reserves in Q3, (down from 59.4% in Q2)

6. Truck engine maker Cummins must pay 1.675 billion USD fine for installing faulty emissions devices on hundreds of thousands of engines to evade regulators

7. China announces measures to reduce "excessive gaming" among citizens:

   • this led to sell-offs in stocks of major tech names worth 80 billion USD, led by Tencent.

Tencent shares drop -16% in minutes — the company's largest single-day drop since 2008.

• Tencent's market cap evaporates ~55 billion USD following this news.