One of the significant economic data points investors got this week was the Consumer Price Index (CPI) report for January. The CPI report showed that overall inflationary pressure has slightly slowed when compared to December’s rate but is higher than economists’ projections. 

As a reminder, the CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. In other words, it’s a measure of consumer inflation.

January’s report was especially notable as it featured an update to the methodology. More specifically, starting with January 2023, the US Bureau of Labor Statistics will update weights annually for the CPI based on a single calendar year of data, using consumer expenditure data from 2021. This is a change from the prior practice of updating weights biennially using two years of expenditure data. 

January 2023 CPI report explained

With that in mind, this most recent report saw consumer prices reaccelerate in January to 0.5% to their highest level in three months, in line with consensus expectations. As we looked under the hood at components of the CPI, we saw some positive signs: airfare was down 2.1%, used vehicles were down 1.9%, and medical care services were down 0.7%. 

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However, housing rents, the biggest driver of CPI for January, rose 0.7% and resulted in the shelter component of CPI posting its most significant two-month increase in over three decades. 

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Yet, many analysts downplayed the shelter component of CPI. They think a softening in rents over the last month or two will eventually show through the CPI data and help lower inflation from 6.4% overall and 5.6% for core prices, which strip away energy and food. Whether that happens remains to be seen. 

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Source: Bloomberg

But we know that CPI continues to show inflation well ahead of the Fed’s 2.0% inflation target, increasing the likelihood that Jerome Powell and the Fed will keep raising rates and force more hawkish comments over the weeks and months ahead. 

With that as our backdrop, it is no surprise that Fed Funds Futures have now started pricing at a terminal rate of 5.5%. This is up from 5.25% and signals that the market expects no rate cuts until December. 

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Source: The Kobeissi Letter

Are we still heading toward a recession? 

Looking back at last year, just the thought of rate cuts sent markets lower. This year, additional rate cuts aren’t scaring investors at all, as improved short-term asset price performance has apparently removed all worries. In fact, this year, it appears that nearly every data point, positive or negative, is being rationalized as inconsequential when convenient. 

There is no better place to witness this than in the expectation of recession in the chart below. After hitting peak recession fear in November, recession fears are firmly in retreat. 

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Despite recession fears recoiling, we urge some caution and discipline at this time. While it is possible that things somehow work out without a recession, the opposite is also likely. In fact, fourth-quarter 2022 earnings are showing the first negative year-over-year contraction since the COVID recession. Until we get signs that earnings have the potential to expand once again, it may be too early to say we are entirely in the clear.  In the meantime, you can reference our article on how to survive a recession for precautionary tips you can take or talk to our team about your current investment risk management strategies.

Moving forward, investors should closely monitor economic data points — such as the CPI report — for additional signs of economic activity. The labor market will also remain a key factor to watch in this recovery, as job growth is a major component of economic expansion.

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Weekly Global Asset Class Performance

While it’s still too early to say that the economy is out of the woods, investors should remain vigilant and look for further signs of economic activity in the coming weeks. Take a look at the chart below and talk with your advisor about whether your current asset allocation is still the best balance in terms of your risk tolerance and goals.

Concerned about how your portfolio will stand in the current markets? Contact Avidian.

If January’s CPI report leaves you needing clarification about how to appropriately allocate between investments, contact the wealth advisors from Avidian Wealth Solutions. 

We are a high-net-worth investment firm with over 20 years of helping clients protect their wealth from turbulent markets. One of our seasoned advisors would be happy to help you build a financial plan and assist you in executing it so that you accomplish your financial goals and objectives. Schedule a conversation with us today.

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