Is this U.S.-China selloff a buy? A top Wall Street voice weighs in
The following discussion is courtesy of Paul Mortimer Lee, as provided by Edward Albert. Paul makes an interesting case that PCE prices, the Fed’s primary gauge of inflation, is likely to decline. Supporting his view is a relatively wide and growing gap between the prices witnessed by the non-financial corporate business sector, also known as NFCB, and the personal consumption expenditures (PCE) price gauge.
The NFCB measures the change in prices experienced by the corporate sector. As shown below on the right side, NFCB is running at 1.19%, well below PCE prices.
NFCB tends to lead PCE because shifts in corporate investment, hiring, and prices usually reflect management’s expectations about future demand. Given that corporate executives tend to be more aware of business cycles, economic changes, and price trends than consumers, their actions often occur well before the average consumer alters their spending patterns.
Paul explains that NFCB and core PCE inflation “normally move closely together,” indicating that when one rises or falls, the other tends to follow suit. The graph on the left confirms the existence of a statistically significant correlation, supporting Paul’s logic. It’s worth noting that the current gap supports the fact that corporate profit margins are larger than usual, as corporate price inflation is less than consumer price inflation.
However, if weakness in personal consumption persists, it will likely compel companies to reduce prices, thus sacrificing profit margins to help maintain revenue and market share. Such actions, in aggregate, would likely reduce or eliminate the corporate versus consumer price gap, as Paul theorizes.
Paul’s conclusion is as follows:
Inflation generated by the non-financial business sector has stabilized at a level significantly below the 2% target, and we should expect the rate of increase in the core PCE to converge on that target over time.
The Week Ahead
It could be a quiet week if the government remains closed and no government economic data is released. However, if Congress reaches a resolution, we can expect the BLS report to be released within a few days of the agreement being reached.
On Wednesday, the FOMC will release its minutes from its meeting three weeks ago. We will be interested in seeing if there was much debate regarding raising rates by 25 basis points versus 50 basis points. The Treasury will auction 10-year notes on Wednesday and 30-year bonds on Thursday. Expect some volatility in the Treasury market leading up to the two actions.
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