The Fed dominated the headlines last week, but as we teach in the M2SD curriculum, monetary policy decisions are downstream of inflation. Inflation data last week showed a continued softening of both consumer and producer price pressures in November. Producer price tends to lead consumer price trends by about a quarter, as supply chain snags and higher materials costs that businesses incur are passed onto customers with some delay. Lately, however, supply chains pressures have been easing, meaning businesses are losing pricing power in the goods and services they sell to one another. This should eventually lead to even softer consumer price inflation, but with a few caveats. First, consumer price inflation has a far larger rent component than producer price inflation does, which could cause the gap between the two to persist unless rent inflation softens further. Second, on a category-by-category basis, the gap between consumer and producer price inflation reflects trends in profit margins, which have rebounded for many firms in 2023.

The Macro Week In Review

The Macro Week Ahead

1) The National Association of Home Builders Confidence Index hit its low for the year in November as higher rates and fears of a slowing economy threatened the construction industry. Since this measure – a leading indicator for the overall economy – tends to be very sensitive to changes in mortgage rates, the drop over the past six weeks should cause it to bounce.

2) Are falling gas prices helping economic “vibes” enough to boost consumer confidence? We’ll get the answer on Wednesday when the Conference Board’s Consumer Confidence report is released. We’re looking for another small increase after sentiment hit bottom for the year in October.

3) The main event for the week will come on Friday with the release of the November U.S. personal income and outlays report, which will provide updates on consumer spending, saving, income and inflation. The Fed targets the core inflation figure from this report, which we think will show only a very slight increase in November and a further deceleration in Y/Y price inflation.

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