Investors continue to heavily debate the Fed's next few moves as the US economy shows few signs of cooling. On top of higher-than-expected job gains in January as well as inflation delivered by the Consumer Price Index on Tuesday, Wall Street is now digesting stronger than expected Retail Sales, which rose +3.0% in January.

Every single category showed a monthly gain, led by a +7.2% surge in sales at food services and drinking places, up +24% in January of this year compared to January of last year.

Obviously, Covid was ripping fairly well during January of last year and not nearly the worry this January, so that helps explain the big jump higher, but it also shows that the US consumer must not be struggling too much if they are wanting to still go out and spend.

On the plus side, strong consumer spending and continued job growth (over +500,000 in January) are all signs that the Fed has been correct in its belief that the US economy can withstand tighter financial conditions created by the central bank's steady rate hikes.

The downside however is that inflation is likely to remain stubbornly elevated as long as consumers are still spending at a healthy clip and the job market stays hot. Meaning the disinflation that bulls have been anticipating could be a long process.

Services remains the thorniest area with shelter prices having a heavy influence. An index of rental prices produced by Zillow found that asking rents declined in October, November, and December 2022, the last months for which data was available.

Zillow says the government's rent metrics tend to lag its rental index by about a year. Home sales have a similar lag. Interestingly, some economists are wondering if the government's home price metrics could be "broken" since there are so few homes being sold, which could in turn work to keep American home prices from declining.

For the week ending February 4, home inventory was up by +70% compared to last year as "buyers just aren't biting," according to New listings are slowing down too, dropping -11% in response to low buyer interest.

Fewer buyers is due to the combo of high home prices and high mortgage rates. Median listing prices were sitting around $400,000 in January, while mortgage rates had pushed to 6.62% by Tuesday afternoon, up from a low of 5.99% at the start of the month, according to Mortgage News Daily. There is some worry that continued Fed tightening could lead to a collapse in the housing market, though the severity differs depending on who you ask.

Most real estate analysts still expect a drop of 10-15% this year but even that level of "correction" would leave median home prices up as much as +30% or more compared to 2020. Notably, those forecasts generally assume mortgage rates stay below 7%. It's worth noting that inflation for goods is now below the Fed's +2% target rate.

For the three months ended January, core goods prices actually fell at an annualized -2.1% rate, which has helped contribute to the overall slowdown in inflation. Economists are skeptical that goods prices will fall much more, though, as inventories and demand come back into balance. The caveat is potential recession which many still anticipate the economy will slip into by the second half of this year.

A recession would push up unemployment and effectively quash demand for everything, which could obviously pull inflation back pretty swiftly. I should mention that the Congressional Budget Office said yesterday that it expects the US economy to stagnate this year with the unemployment rate jumping to 5.1%.

The next major inflation test arrives today with the Producer Price Index (PPI), which is expected to rise +0.4% on the month for a year-over-year increase of +5.5%. That would be a sizable step down from +6.2% in December but may not mean much to investors as it's clear that most inflation pressures are tied to services.

Other data today includes Housing Starts & Permits and the Philadelphia Fed Manufacturing Index.

There are also several Fed officials scheduled to speak today, including Cleveland Fed President Loretta Mester, who is among the more consistently hawkish central bank officials.

Today's earnings highlights include Applied Materials, DoorDash, DraftKings, Hasbro, Hyatt Hotels, The Southern Company, and Vulcan Materials.

Some Energy Insiders Looking for Higher Fuel Prices This Summer: Rebecca Babin, CIBC Private Wealth senior energy trader told Yahoo Finance that she doesn't think we’re set up for a quiet, easy-going summer for prices at the pump. Enjoy it for now she adds, but be ready to see increases. Gas prices are currently hovering around a national average of $3.42 per gallon, down -6 cents from a week ago, and well off the $5 reached last summer. According to Babin, the market was pretty ready for Russia to cut production at the start of 2023 but stated that the reality is, Russia is probably having a hard time moving these barrels as we moved forward into the February 5th increased sanctions on Russian products. Now we’re running onto a smaller market for Russian oil products and fewer tankers that can actually ship products. Babin believes the reason for higher prices this summer is that it's going to possibly coincide with when Chinese demand ramps back up. She reminds us that demand isn't linear, meaning it may not occur as fast as the trade expects and can often lag. Source YahooFinance

America's Demographic Continues to Gray: An estimated +17% of people living in the US, or more than 1 in 6, were 65 or older in 2020, according to a report from the Administration on Aging. That represents 55.7 million people, or a +38% increase in people 65 and older since 2010. It also reflects a consistent increase in the nation's older population since 1900, when there were 3.1 million Americans 65 and older or just 4% of the population. The report projects a climb to roughly 80.8 million residents 65 and older by 2040, more than double the number in 2000. It also predicts a doubling of the number of even older residents by 2040, with the count of those 85 and older expected to grow from 6.7 million in 2020 to +14.4 million by 2040. Source Yahoonews

Casinos Raked In Record-Shattering $60 Billion In Revenue Last Year: Commercial gaming revenue in the U.S. topped $60 billion last year for the first time ever, according to a new report from the American Gaming Association, driven by a modest rise in slot and table gaming revenue along with an explosion in sports betting that topped 2021’s record of $53 billion. Slot machines were far and away the biggest moneymaker, raking in over half of the total revenue—$34.2 billion, a +5.1% increase from 2021. Table games came second with $10 billion in revenue—a +13.9% rise from 2021—but sports betting is closing in quickly on the traditional casino plays. Sports betting generated $7.5 billion in revenue during 2022—a whopping +72.7% increase from a year earlier—after gamblers wagered a combined $93.2 billion on sporting events throughout the year. The burgeoning iGaming industry, where gamblers play traditional casino games on their phones, brought in just over $5 billion in revenue—a +35.2% increase from a year earlier—despite only being legal in six states. The American Gaming Association credited the revenue rise to Americans turning away from illegal gambling, even though it recently estimated Americans wager more than $500 billion a year through illegal gambling operations. The announcement came after an estimated $16 billion was bet on Super Bowl LVII—a sports betting record for a single event. Some 100 million sports betting transactions were made this weekend alone, according to a CNBC analysis. Source Forbes

Why Inflation Could Remain "Sticky" for a Decade: Despite inflation and recession fears, Americans have continued spending over the past year, keeping businesses open and people employed. Even now, as the money many people saved during the pandemic dries up, spending is still going strong. But the commitment by U.S. consumers to buy, and then buy some more, is a double-edged sword. While it’s keeping the economy humming, it could also lead to inflation and high prices for years to come. Part of what’s behind the expected buying boom and “sticky” inflation is demographics. Nearly 100 million Americans are at an age when they tend to spend big, according to Bill Smead, chief investment officer at investment firm Smead Capital Management. Smead’s argument is largely backed up by recent survey data. In 2021, nearly 70 million Americans were between the ages of 19 and 35, and around 150 million, or almost half the U.S. population, was between 19 and 54. These are prime spending years, according to the Bureau of Labor Statistics, as expenses for almost every category—including food, housing, clothing, and transport—increase the most between ages 25 to 54, when incomes tend to peak and people make most of their big purchases. Source Fortune

Survey Fatigue Threatens to Undermine US Economic Data: Federal Reserve Chair Jerome Powell and his colleagues often emphasize that they are “data dependent.” But what happens if you can’t depend on the data? Concerns are growing about how diminishing participation in the surveys behind key US economic indicators will affect the quality of such statistics. While policymakers haven’t seriously questioned their credibility, it is something that bears watching, economists say. Current and former officials say lower rates of participation don’t necessarily mean less accurate data, but there is potential for error to creep in if the trend can’t be arrested. The response rate for the employment cost index, a pay measure closely watched by the Fed, has fallen to below 50% from nearly 75% at the end of 2012. Importantly, the response rate on the so-called JOLTS survey on the number of job openings — a data series the Fed highlighted repeatedly last year — was already falling before the pandemic, which saw participation decline even further. The rate is now just under 31%. The JOLTS numbers have been particularly volatile in recent months, with a December bounce catching markets by surprise. Observers have speculated that some of the wild ups and downs reflect, at least in part, a decline in response rates. Source Bloomberg

Tesla to Double Supercharger Network, Open it to Non-Tesla EVs: Tesla and the White House announced that they reached a deal for the former to open its Supercharger network to non-Tesla EVs in the US. The automaker also confirmed plans to double its number of chargers in the US by 2024. In Europe, Tesla has already opened hundreds of stations in most countries it operates in. The move will be a bit more complicated in North America since, unlike in Europe where Tesla uses the standard CCS connector that is on all electric vehicles there, here, it uses its own proprietary connector, which makes opening the Supercharger to non-Tesla EVs more difficult. Tesla has a solution to onboard EVs with CCS connectors on the Supercharger network with something called the Magic Dock, which is basically an integrated CCS adapter on Supercharger stalls. Tesla has a strong incentive - access to the $7.5 billion in funding for EV charging infrastructure that the federal government announced. It's chargers have to work for EVs from more than one automaker, however. Source Electrek

Mortgage Demand Declines but Builders Are Becoming More Confident: The future for home sales brightened in February, according to a builders’ trade group. Yet new mortgage data show the path might be choppy. Home builder sentiment improved in February, the National Association of Home Builders said Wednesday. This month’s reading, the second consecutive increase following a full year of declines, brought the index to its highest level since September 2022. Of the index’s sub-components, expectations of sales in the next six months increased the most, to a reading of 48 from a reading of 37 in January. The two other components, measuring current sales conditions and buyer traffic, also gained. “While we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024,” National Association of Home Builders Chief Economist Robert Dietz said in a statement. Such volatility appeared in the Mortgage Bankers Association’s most recent weekly measure of mortgage application volume, also released Wednesday. Volume overall last week declined a seasonally-adjusted -8% last week, according to the Mortgage Bankers Association. Source Barrons

EU Lawmakers Vote to Ban Sale of New Gasoline-Powered Cars From 2035: European Union lawmakers approved a law that will effectively ban the sale of new gasoline- and diesel-powered cars in the bloc from 2035, one of the most aggressive moves yet by a major economy to accelerate the transition to electric vehicles. The law is set to require new cars and vans to have significantly lower carbon emissions by 2030 and zero emissions by 2035, a requirement that industry groups say is expected to result in an end to the sale of new vehicles that use traditional combustion engines, and accelerate the shift to EVs. In setting a date to wind down sales of new passenger vehicles using internal combustion engines, the EU’s move will likely further fuel a global shift that is already having a huge impact on investment and product development by car manufacturers and their suppliers. The deal reached by lawmakers left the door open for the possibility that vehicles that run exclusively on carbon-neutral fuels could be sold after 2035. Several other jurisdictions have passed similar legislation or announced target dates for combustion engine bans, including Canada, the U.K. and Norway. Auto-industry executives expect the global push to ban new sales of gasoline and diesel vehicles to accelerate by 2030.Source WSJ

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