The big event of the week will be Friday’s report on the Personal Consumption Expenditures (PCE) inflation index. This, rather than the CPI, is the inflation measure that the Federal Reserve watches.
In the fourth quarter of 2022 credit card balances rose to a record high of $986 billion. The $61 billion increase from the third quarter was the biggest in data going back to 1999. The increase pushed Americans’ total credit card debt past the previous high of $927 billion, which was set in the fourth quarter of 2019, according to the New York Fed’s Household Debt and Credit Report. And it’s not just rising balances. Borrowers are missing payments too and delinquency rates have passed pre-pandemic norms.
U.S. retail sales in January jumped by 3% in January from December, the Commerce Department reported today, February 15. Economists surveyed by Bloomberg had expected a 2% increase. Retail sales had dropped in December and November. Together with the strong job gains in January, this data point reduces the likelihood of a recession in 2023 and increases the odds that the Federal Reserve will continue to raise interest rates after its May 2 meeting.
On a year-over-year basis headline CPI inflation fell in January. Data released by the Bureau of Labor Statistics this morning, February 14, showed all-in prices rose 6.4% in January 2023 from January 2022. That was a slight drop from the 6.5% year-over-year rate measured in December. (Remember the inflation rate peaked at 9.1% in the summer of 2022.) But on a month-to-month basis, January prices rose 0.5% from December.
The consensus is that the headline all-in year-over-year inflation rate will come in at 6.2% for January when the Bureau of Labor Statistics reports the numbers before the New York market open tomorrow February 14. That would be down from an annual 6.5% rate in DecemberGood news for investors and traders hoping that the Fed will end its current cycle of interest rate increase soon (June or July) and with a peak rate of 5.2% or less. The worry remains the month-to-month move in inflation with the consensus looking for a 0.4% increase in the CPI inflation rate in January from December.
Russia plans to cut its oil output by 500,000 barrels a day next month, the Russian government announced today. That magnitude of cut would be roughly 5% of the country’s January output. Crude prices jumped on the news, with global benchmark Brent closing higher by 2.37% to $86.50 a barrel. U.S. benchmark West Texas Intermediate closed up 3.24% at $79.81 a barrel.
As of the close in New York today, February 9, the Standard & Poor’s 500 was down 0.88% and the NASDAQ Composite was off 1.02%. That’s not a big absolute drop but it does mark quite a turnaround from earlier in the day. At 9:51 a.m. the S&P 500 was up 0.89% and the NASDAQ was higher by 1.21%. It’s a tribute to the strong bullish sentiment in this market (of which more later in this post) that stocks have held this ground. Certainly, macro “facts” continue to line up against an extension of this rally. Besides the continuing debate about where (and when) interest rates may peak, today we’ve got a continued inversion in the yield curve for Treasury bonds.
Fewer U.S. companies are topping earnings estimates than normal this quarterly reporting season. Of the 283 companies in the Standard & Poor’s 500 that have announced results for the fourth quarter of 2022, 70% have posted better-than-expected earnings. That may seem like a lot. But given Wall Street and CEOs’ usual game of guide low and then beat, it is less than usual. A year ago 78% of companies in the S&P 500 beat earnings estimates, according to data compiled by Bloomberg.
On the one hand, stock markets heard Federal Reserve Chair Jerome Powell reiterate his comments of last week that “disinflation” had become visible. On the other hand, bond markets and investors betting on the direction of the Fed Funds rate heard the Fed chairman tell the audience at the Washington Economics Club this morning, that the labor market remains extraordinarily strong, and if the jobs market doesn’t cool, the Federal Reserve will need to take its peak interest rate higher.
Eurozone retail sales dropped by 2.7% in December from a month earlier. November retail sales rose 1.2% from October. Economists were looking for a 2.4% month-to-month drop in December so these results were worse than expected. (The EuroZone figures are adjusted for inflation.) Retail sales decreased by 2.8% in December of 2022 on a year-over-year basis.
Today, Friday, February 3, the Bureau of Labor Statistics reported that the U.S. economy added a whopping 517,000 jobs in January. Economists had been expecting more along the lines f 50,000 jobs added in the month. The huge January surge took the headline unemployment rate to 3.4% The last time the unemployment rate was this low was May 1969. On the surface, the stronger, the much stronger, than expected job gain in January will put pressure on the Federal Reserve to continue raising interest rates. If the labor market is booming, it’s hard o see inflation coming down rapidly. But the real story here may be beneath the surface.
Here’s what I expect on Wednesday. The Federal Reserve’s Open Market Committee will announce a 25 basis point interest rate increase. In his post-meeting press conference Fed chair Jerome Powell will try to talk the financial markets out of their exuberance by stressing that the Fed doesn’t see a quick end to interest rate increases because at 5% inflation is still running way ahead of the Fed’s 2% target rate. And I expect that investors and traders will ignore Powell’s comments and bid stocks high because a pause in rate increases is just around the corner–maybe as early as March–and financial markets can look for the Fed to begin cutting interest rates in the second half of the year. To which I say, Bushwah! I would sell any post-meeting rally. March increasingly looks like the month where reality will whack the markets on its head.
