Robert Genetski: Overall Inflation for 2023, 3.3 Percent

Robert Genetski: Overall inflation for 2023 3.3 percent, and lagging impact of higher interest rates will be a drag in 2024.

By Robert Genetski

The Week That Was

December’s inflation news was a bit disheartening. Both total inflation and core inflation rose at 3.7 percent annual rates. Soaring prices for electricity offset the benefit of a slight decline in oil prices. A sharp jump in auto insurance also kept inflation elevated.

For the year as a whole core inflation was up 3.9 percent and overall inflation 3.3 percent. These rates are not low enough for the Fed to end its tight money policy.

Today’s producer price report showed December was the fourth consecutive month of 0 percent core inflation. The economy has been weak enough to end inflation at the wholesale level. The economy is likely to remain weak enough in 2024, for the Fed to achieve its 2 percent target for consumer inflation.

Things to Come

On Wednesday, the January Homebuilders Index will provide the latest insight into housing conditions. Homebuilders have the best and most current information, particularly at this time of year when weather conditions can impact the reliability of other housing data.

Although mortgage rates were down from their peaks in December, the Homebuilders’ Index was at a depressed level of 37 (50 is breakeven). With new home inventories rising to a high 9-month supply, expect the new home market to remain depressed.

Wednesday’s December retail sales data also can provide insights into the economy. Through November retail sales have been growing at a 4 percent annual rate. This is consistent with a similar rate of growth in weekly earnings. Any signs of a further slowdown in sales could provide a hint that the weakness in housing is spreading to the rest of the economy.

Market Forces

Stocks moved slightly higher this week. Prices are currently back to four weeks ago.

There are many reasons to expect a good year for the market. All technical or psychological indicators are positive. Most market guru’s see a good year for the economy and earnings. Presidential election years are mostly positive. Stocks held up well amid this week’s negative inflation report.

The next test for stocks will be fourth quarter earnings reports. We believe S&P earnings are likely to be down from the third quarter due to the combination of slower real growth and high interest rates. If so, it should take some of the wind out of the market’s upward momentum.

The Fed is on tract to sell another $95 billion in securities this month. By the end of this month the Fed will have taken $1½ trillion of money out of the economy, completely offsetting the $1½ trillion added in the prior 18 months. Other measures of money and inverted yield curves confirm a scarcity of money.

The recent full percentage point decline in long-term interest rate is consistent with a further slowdown in the economy and a further decline in inflation.

Despite all the optimism surrounding the stock market, the existing strength is an odd development. Stocks are behaving as if the economy and profits will remain strong. Either stock prices have it wrong or the money supply and inverted yield curves are wrong. We continue to believe that the lagging impact of monetary restraint will impact both the economy and earnings. Stocks remain vulnerable.

Outlook

Economic Fundamentals: positive

Stock Valuation: S&P 500 overvalued by 17 percent

Monetary Policy: restrictive

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