US Macro Recap and Outlook

Introduction

Welcome to our discussion on the US economy. In this article, we'll be taking a measured look at some important recent trends. We'll start by examining inflation, as recent figures show they have declined. The Federal Reserve has been trying to combat this with interest rate hikes, and we'll consider their potential impact and what the Fed's actions might signal for the future.

We'll also review the latest FOMC rate hike decison and what the future holds for rate hikes.This is an important context for our final topic: the potential impact of these economic conditions on risk assets, including cryptocurrencies. Lets get into it.

Inflation is falling

The Bureau of Labor Statistics (BLS) disclosed a significant easing in the Producer Price Index (PPI) for the 12 months that ended in May. The data, which were released on Wednesday, indicated an annual rate of price increases seen by producers standing at 1.1%. This marked a substantial moderation from the 2.3% surge recorded in the previous month of April. A conspicuous driver of this decline can be attributed to a downturn in energy and food prices. Intriguingly, this measure of inflation has been on a decelerating trajectory for 11 consecutive months. It's worth noting that the current reading is the lowest annual figure since December 2020. This was a period when the economy was beginning to rebound post-pandemic, and producer prices commenced their inflationary ascent.

Furthermore, the Consumer Price Index (CPI), another significant barometer for inflation, was subject to scrutiny through data released on Tuesday by the Bureau of Labor Statistics. The CPI monitors changes in the prices of a diverse basket of goods and services. For the year culminating in May, the index saw an increase of 4%. This exhibits a pronounced retraction from the 4.9% noted in April and marginally undercut economists’ forecast of 4.1% as per Refinitiv. Analyzing this on a monthly scale, prices inched up by 0.1%, defying economists’ anticipations of a 0.2% rise from April to May.

In a broader perspective, this downturn in inflation marks the 11th successive month of deceleration. Economists and consumers alike are likely to receive this development with a sigh of relief, particularly considering the protracted period of acutely high inflation that had been a source of consternation over the past two years. It is paramount to juxtapose the current CPI data with the figures from the same period last year, which stood at a staggering 8.6%.

In conclusion, the downtrend in both the Producer Price Index and the Consumer Price Index signals a potential stabilization in the inflationary pressures that have been exerting strains on the economy. While this trend is undoubtedly encouraging, vigilance and astute analysis will be essential in gauging how sustainable this easing of inflation is in the context of the broader economic landscape.

A rate hike decision

In a major change on the subject of money policies, the committee in charge at the Federal Reserve decided not to raise interest rates during their latest meeting. This breaks a pattern of 10 rate increases that have been happening since March 2022. By choosing not to raise rates, the central bank is taking a careful approach. This gives them more time to closely watch and understand the effects of their actions to fight inflation.
Additionally, the central bank hinted that they might need to raise rates later this year, with many committee members expecting a possible half-point increase. Federal Reserve Chair Jerome Powell pointed out a particular problem - the fact that rental costs are not falling as expected. Powell said, "You're just not seeing a lot of progress, not the kind we want to see," emphasizing how serious this issue is. The futures markets are also reflecting heightened anticipation among traders regarding the Federal Reserve’s actions. According to the CME FedWatch Tool, there is approximately a 70% probability of a rate hike during the Fed's meeting scheduled for July 25-26. It is germane to note that Chairman Powell clarified that the decision to retain rates was specific to the current meeting, and that no decisions regarding future meetings have been taken at this juncture.

Moreover, Powell disclosed that the median forecast among the FOMC participants is for the core PCE inflation to culminate at 3.9% this year on a 12-month basis. This development was emblematic of a trend observed over the past three years where core PCE inflation has consistently ascended over the course of each year. This pattern has been interpreted by the Chairman as an indication that policy makers ought to intensify their efforts.
The Federal Reserve's decision to pause on increasing rates shows its careful plan to watch inflation. The central bank knows more steps might be needed, especially because rents aren't going down as they should. Both policymakers and those involved in the market will be closely watching the economy in the next few months. They want to understand how well the central bank's actions are working and guess what might happen next with money policies.

As a macro larp, this information tells me a lot about where the economy might be going and how that could affect risk assets.

First, the Federal Reserve choosing not to increase interest rates is generally good for risk assets. When rates are low, people are more likely to borrow money to invest in these kinds of assets, which can drive their prices up. But, the Fed has also hinted they might raise rates later this year. If that happens, it could make risk assets less attractive since borrowing money would become more expensive.

The second important point is about inflation. Inflation has been slowing down for nearly a year, according to both the Producer Price Index and the Consumer Price Index. Lower inflation is usually a good sign for risk assets because it means the purchasing power of money isn't decreasing too quickly. However, the situation isn't totally clear. Jerome Powell, the Federal Reserve Chair, said that rents, which are a big part of the CPI, are not going down as they should. This could be a sign that inflation might increase again, which would be bad news for risk assets.

Lastly, the anticipation of a potential rate hike in the next Fed meeting, as reflected by the futures market, creates uncertainty. Uncertainty can lead to volatility, or big changes in prices, which can be risky for traders.

So, overall, while the news from the Federal Reserve and the lower inflation rates might seem like good news for risk assets at first glance, there are still some things to be cautious about, like potential rate hikes and the issue with rent prices.