September 29 – Wall Street closes out the month and the fiscal quarter today, even as the federal government closes out the fiscal year, possibly lacking the funding to start the new fiscal year. As such, Wall Street received a dose of inflation data this morning, but that may be the last government data available for it and for the Federal Reserve to digest for a while if we go into a partial government shutdown over the weekend. The VIX is trading near 16 this morning as fears ease on Wall Street, while the dollar index is trading lower near 105.9. Yields on 10-year Treasuries are trading near 4.53%, while yields on 2-year Treasuries are trading near 5.02%. Crude oil prices are again pushing higher today, up modestly in early trading, while the grain and oilseed markets were mostly mixed ahead of today’s big USDA reports.
Personal income rose 0.4% month-on-month in August, matching analyst expectations, but up from the 0.2% gains seen in July. Personal consumption expenditures were also up 0.4% month-on-month in August, which was below analyst expectations of 0.5%, and notably slower growth than the 0.9% growth seen in July. The headline PCE price index rose 0.4% month-on-month in August as gasoline prices surged, although that was a bit slower than the 0.5% growth expected by analysts. That compared to a slower inflation rate of 0.2% in July. The headline PCE price index rose 3.5% year-on-year in August, matching analyst expectations, although up from 3.3% in July. The core PCE price index that excludes food and energy rose just 0.1% month-on-month in August, which was less than the 0.2% seen the previous month and less than the 0.2% growth expected by analysts. The core PCE price index rose 3.9% year-on-year in August, matching analyst expectations, and down from the 4.2% seen in July.
These are good numbers – better than expected. These numbers recognize the commodity inflation that is largely a product of rising energy prices, but it shows core inflation continuing to cool. Core inflation is still essentially twice the mandated 2% level, but it’s moving in the right direction. The primary questions facing central bankers are, a) will we continue to move in the right direction if both the consumer and the markets perceive that policy is about to pivot, and b) will it continue to move in that direction sufficiently to hit the 2% level with no further intervention by the Fed, even if energy prices continue to escalate as they permeate through the economy? Those questions are difficult enough for the Fed to answer, but now you can throw in a likely government shutdown, UAW labor strike and rapidly expanding national debt pushing interest rates higher to further complicate matters. The Fed uses those questions to justify pausing its rate hikes currently to see how they play out in the weeks ahead, while continuing to spread the hawkish message that contains the euphoric spending that can come from a perceived pivot.
A partial government shutdown appears imminent as we approach the 11th hour of negotiations in Congress. The House of Representatives is working on 12 appropriation bills to fund the government, which is the proper way to do things, providing transparency to a fiscal budget process expected by our founding fathers. That’s opposed to the way that Congress has funded government in recent years – with a series of continuing resolutions that allowed spending to balloon. The problem is that the House leadership started the process too late. There isn’t any conceivable way that the House can pass all 12 appropriation bills in time, let alone then get them through the Senate. Both houses of Congress have considered short-term stopgap funding bills, but they are philosophically different enough that neither thus far supports what has been proposed by the other.
As such, a partial shutdown is expected. I say partial because essential services continue. Most Americans will see little more than inconveniences, although government workers will be without a paycheck through the duration. They’ll eventually get paid, but they’ll have to do without during the shutdown – a hardship on them, and a modest drag on the economy due to a reduction in their spending. The markets will operate in a vacuum of data during the shutdown, which could lead to some increased volatility and uncertainty. Otherwise, grocery store shelves will continue to be stocked, gas stations operate, and life will be relatively normal for most Americans. Politically, the Republicans typically receive the bulk of the blame for a shutdown, which could make things interesting then in next year’s elections, and in the crucial debt ceiling negotiations that need to take place by January 1, 2025. All of these Washington political fights would appear to be a lot of theater with little impact on the markets, but we’re beginning to see the consequences of the political spending and gridlock play out in the commodity markets in a way not understood yet by most observers. I expect this to increasingly be the case in the months going forward.
