The equity markets reached new highs last week, with the Nasdaq setting a record on Thursday and again on Friday, surpassing its November 2021 peak after more than two years. The market closely watched the release of the PCE (Personal Consumption Expenditure) inflation indexes, which came in line with expectations for January. The PCE index, considered a more accurate measure of inflation by the Fed, showed a 2.4% year/year rate for January, down from 2.6% in December. The core index, excluding food and energy, stood at 2.8% year/year.
Service prices rose by 0.6% in January, reflecting a return to normal consumption patterns post-pandemic. However, goods prices fell by 0.2% in January. The Fed is unlikely to consider rate hikes in the near future given the moderate inflation figures.
Concerns arise in the commercial real estate (CRE) sector, with regional banks increasingly exposed to CRE lending. Delinquencies in commercial mortgage-backed securities (CMBS) have tripled to 6.3% over the past year, indicating potential challenges ahead. The Kansas City Fed's Commercial Real Estate Index shows a decline, with only three of the 13 contributing factors showing positivity.
Moreover, pending home sales remain low, signaling a prolonged housing downturn. Unemployment claims have risen, with continuing claims reaching levels not seen since the pandemic. Retail sector struggles are evident, with major retailers like Macy's closing stores and soft sales projections for 2024.
Manufacturing indexes, such as the Dallas Fed Manufacturing Index, have been negative for several months, indicating a manufacturing recession. Despite some disappointing inflation numbers in January, the overall inflation outlook remains moderate. However, deflation could become a risk if the Fed delays easing measures.
In summary, the markets are at a critical juncture with potential challenges in inflation, commercial real estate, housing, unemployment, and manufacturing sectors. Monitoring these indicators will be crucial in navigating the economic landscape in the coming months.
