Fed’s favored inflation gauge under 2%

The Fed’s favored inflation gauge, Personal Consumption Expenditures (PCE), showed the first monthly decline of 0.1% since early 2021. Core PCE, which excludes food and energy, was up 0.1% as expected and 3.2% year over year. However, looking over the prior 6 months, the Core PCE reading is 1.9%, just below the Fed’s official 2% target.

• The Fed’s own dot plot does not have Core PCE coming close to 2% until late 2024
• The 6-month reading shows we could be sub-2% sooner than that
• This further supports the Fed’s pivot last week
• The risk is now that inflation re-accelerates as financial conditions continue to ease

A “no-landing” in the cards?

It is the time of year when financial firms put out their 2024 projections and as per usual we have consensus amongst the banks. Unanimously, the banks see either a soft-landing or mild recession in 2024, inflation back to 2%, Fed easing, and mild upside for the S&P 500.

• If we know anything, it is that the consensus is almost never correct
• The other scenarios that are possible are:
• A hard landing: a more pronounced recession
• A re-acceleration of the economy: a “no landing”
• Given the Fed’s pivot, the second of those seems more feasible than the first
• Now that we know the direction of interest rates from here is DOWN, it could influence behavior of both consumers and companies
• If animal spirits are stirred then economic activity could rebound from here

Bitcoin ETF seems closer

There were reports of the SEC holding multiple meetings in the last few weeks about the Bitcoin ETFs that have been proposed. It looks likely that we will see an approval in early 2024, and maybe even earlier. Hopes of this have driven the price of Bitcoin higher over the last few months, and we have now seen broader participation in the crypto ecosystem.

• A Bitcoin ETF would be a very positive development
• Providing individuals, institutions, and financial intermediaries with an easy and safe way to access this market is important for broader adoption
• Since a very large part of the outstanding Bitcoin float is held by long term early adopters (HODLrs), the incremental demand could propel the price higher
• Notably, other layer 1 solutions have also spiked higher in price recently

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