Stock indexes are off to a rough start this week as investors debate the threat of more and bigger rate hikes by the Federal Reserve and the impact that inflation is having on the US economy.

All three major indexes were off by -2% or more yesterday, the worst day for stocks since last December. The Dow's decline of nearly -700 points puts it in negative territory for the year.

A surge in bond yields are partially to blame for stock investor jitters with the yield on 10-year Treasuries climbing to 3.953% yesterday, up from 3.827% Friday and under 3.4% at the beginning of the month. The rise in yields comes as Wall Street continues to adjust to the possibility that the Federal Reserve may need to lift its benchmark rate higher than previously indicated in order to cool the US economy.

The S&P Global PMI Composite showed the services sector has rebounded into expansion territory after seven consecutive months of contraction. The sector has been a key driver of inflation as consumers shift spending away from goods to more "experiences." Notably, the increase in prices on the services side was the fastest in four months.

S&P Global economists say the data indicates that the upward driving force on inflation has now shifted to rising wages as firms continue to pass along higher costs to consumers.

Underscoring that struggle, Home Depot yesterday announced a $1 billion ding to its profit forecast due to increased spending on wages for its sales associates. At the same time, the country's biggest home improvement company forecast slowing demand as high inflation takes a toll on consumer spending.

Likewise, Walmart reinforced concerns about the health of consumers with a 2023 forecast below Wall Street expectations as it warned inflation was weighing on budgets. Walmart also noted profit pressures related to shoppers prioritizing spending on everyday necessities like food over discretionary items such as electronics and clothing. The latter typically have higher margins than food items. Investors are anxious to hear from other retailers this week with Overstock and TJX set to unveil earnings today, followed by Wayfair and Bath & Body Works on Thursday.

Other key results due today include eBay, Extra Space Storage, Garmin, Lucid, Mosaic, NVIDIA, Rio Tinto, Pioneer Natural Resources, Stellantis, and Wingstop.

Investors today are also anxious to see the "minutes" from the Fed's last meeting which investors hope might provide some clues as to where the central bank sees rates going from here.

Keep in mind, the previous meeting ended on February 1 and followed several reports that indicated moderating inflation. More recent data has shown a resurgence in both inflation and employee hiring, both signs that the US economy may be too "hot" for the Fed's liking. The Fed at its last meeting was also not considering more recent developments with Russia.

The US is now set to issue even more stringent sanctions and export controls that include Russia's energy sector. According to US officials, the aim is to drive up the cost to Russia of evading sanctions and an oil price cap imposed by the West. Russia has already announced that it will cut March oil output by -500,000 barrels per day, which some say could be a sign that the country is struggling to find buyers for its crude oil. China and India are Russia’s biggest crude oil customers now.

While the US doesn't import Russian oil, lower Russian supplies would likely put strain on overall global supplies and potentially drive up prices here at home. I should also mention that Russian President Vladimir Putin is again threatening to go "nuclear", saying it stands ready to test new weapons if the US does so. There has been a worldwide ban on such tests off and on since the 1960s. Putin also ended his country's participation in a major nuclear-arms-control treaty with the US, though officials later clarified that Russia will still recognize some parts of the deal, such as the treaty's cap on nuclear warheads.

Home Sales Slowed to Weakest Rate Since 2010: Home sales in January declined for the 12th month in a row, reaching the weakest rate since 2010. Homes were sold at a seasonally-adjusted annual rate of four million in January, according to National Association of Realtors data released today. Sales fell 0.7% from the month prior and were about -37% lower than the same month in 2022. Home sales are bottoming out according to Lawrence Yun, the trade group’s chief economist. The median existing home sold for $359,000, a +1.3% gain compared with January 2022 and the lowest year-over-year price change since February 2012, when prices fell -0.3%. The pullback in home sales reflects the continued impact of relatively high housing costs as the monthly mortgage payment on the typical single-family home in the fourth quarter of 2022 was $1,969, the National Association of Realtors said in early February. This is up +7% from the third quarter and +58%, or more than $700, from the same quarter in 2021. Since existing-home sales typically take one to two months to close, it’s likely that most of the deals reflected in January’s housing data went into contract in late 2022. Source Barrons

Office Landlord Defaults Are Escalating, Lenders Brace for More Distress: The number of big office landlords defaulting on their loans is on the rise, fresh evidence that more developers believe that remote and hybrid work habits have permanently impaired the office market. The giant investment manager Brookfield Asset Management recently defaulted on a total of over $750 million in debt for a pair of 52-story towers in Los Angeles, according to a February securities filing. Real-estate firm RXR is in talks with creditors to restructure debt on 61 Broadway, a 34-story tower in Manhattan’s financial district. In another sign of distress, a venture of an investment manager affiliated with Related Cos. and BentallGreenOak is in similar debt-restructuring talks over a $150 million warehouse-to-office conversion project in Long Island City, N.Y., that hasn’t filled up as much space as expected. Five to 10 office towers each month join the list of properties at risk of defaulting because of low occupancy, expiring leases or maturing debt that would have to be refinanced at a higher rate. Source WSJ

Bentley Ending Production of Ultra-Performance 12-Cylinder as it Transitions to EVs: Bentley Motors plans to end production of its 12-cylinder engine next April as the famed luxury carmaker transitions to electric vehicles. The British automaker of ultra-luxury performance cars said the milestone would be celebrated with the most powerful version of the W12 engine ever created, with 740 horsepower and 737 pound-feet of torque. Bentley said the upgraded engine will only be used in 18 Bentley Baturs — handcrafted two-seat performance cars that start at about $2 million. The vehicles are already sold, the prestigious automaker said. The end of the W12 is the latest example of automakers pivoting to all-electric vehicles. Bentley last year said it would spend 2.5 billion pounds (about $3 billion) over the next decade to become a fully electric luxury brand by 2030. Production of the W12 engine will be replaced with expanded assembly of V8 and V6 hybrid engines, according to the company. Bentley says it has produced more than 100,000 of the W12 engines since the assembly began in 2003. Source CNBC

Investors Say $3-$5 Million Needed to Retire Comfortably: Between inflation, market tumult and governments running out of cash to fund pensions, it’s likely retirees are going to have to be more reliant on their own savings—which will now (according to investors) need to be around $3 to $5 million. Most respondents are optimistic they’ll move closer to their retirement goal by ending 2023 with more in retirement savings than at the end of 2022. Last year, inflation and rising borrowing costs hammered stocks, and since bond prices also plunged, the average US 401(k) retirement account was down -20% at plans where Vanguard Group is a recordkeeper. This year, both professional and retail investors expect stocks and bonds to resume their traditional relationship by moving in opposite directions, with fixed-income serving as a cushion for any potential losses from riskier assets. Respondents were not as sure about whether they’d ultimately have enough saved to maintain their lifestyle in retirement. Less than half of investors placed the odds of that at 100%. Only about two-thirds of US private-sector workers had access to a workplace retirement savings plan in 2021, according to the Bureau of Labor Statistics. The average participant account balance across the 5 million or so plans where Vanguard is a recordkeeper was $112,572 at the end of 2022, and the median balance was just $27,376. Source Bloomberg

Spring Break Gets Pricey: Spring break travel demand is picking up, driving up airfare and hotel rates. Travel app Hopper said in a report last week that domestic airfare is averaging $264 a round trip for March and April, up 20% from a year ago and 5% above pre-pandemic levels. Airlines, grappling with pilot shortages and aircraft delivery delays, have already limited capacity growth, which is keeping airfare up from last year. Now travelers are going back to booking patterns common before the pandemic, flying on peak days to traditional destinations, airline executives say. That makes it even more important for travelers to stay flexible if they’re trying to save money to avoid spikes in fares. Spring break demand is “probably the best we’ve ever seen,” Frontier Airlines CEO Barry Biffle said in an interview. “Constrained capacity is real. When you couple that in with higher costs, most notably fuel, people are willing to pay [the higher fares], and the airlines need to charge it.” Source CNBC

Working From Home Saves Workers Thousands Per Year: Between a morning coffee, subway fare, and a bowl of stale roasted greens, the cost of going into the office can rack up. It’s not just a drop in the water—big-city workers are spending thousands of dollars less when they work from home, according to the latest report from Work From Home Research. Workers in New York City are seeing the biggest reduction in spending, an average of $4,661 less per year. It makes sense—in an age of high inflation, the Big Apple stands as the most expensive city in the world. Meanwhile, workers in Philadelphia are spending $2,161 less per year. Metropolitan areas are more likely to accept the trend of remote work considering that they have a larger amount of knowledge workers and saw extended pandemic restrictions—the WFH Researchers have dubbed it a “big-city phenomenon.” But the money goes both ways depending on a worker’s situation, he acknowledges. “If you work from home, you save on gas and car costs, and if you work from home a lot, maybe you need one less car,” said Nick Bloom, professor of economics at Stanford University and one of the researchers behind the report. “On the other hand, you pay more in heating, air conditioning, and electricity at home. Food and drink can go either way depending on your work setup before.” Source Fortune

Worker Pay Worldwide Hasn't Kept Pace With Inflation: Wage growth across advanced economies is plateauing or declining from high levels. For central banks, it is good news: There are no signs of a spiral in which wages push up prices, which push up wages again. That makes it more likely inflation could decline without a significant increase in unemployment. For workers, though, it is less positive. Wages rose faster last year than in the previous two years, but not as much as prices across major advanced economies, according to projections by the International Labour Organization. Workers’ purchasing power—their average inflation-adjusted wage—was lower last year than in 2019, before the pandemic. In the U.S., nominal wage growth—meaning unadjusted for inflation—has slowed sharply since the middle of last year, according to a variety of measures. Average hourly earnings for private-sector nonfarm workers rose 4.4% in the 12 months through January, down from 5.6% last March and less than the 6.4% rise in consumer prices in the year through January. Economists have noted that pay growth tends to lag, not lead, inflation as workers and employers adjust pay expectations to the prices they have experienced. Thus, the recent decline in pay growth might reflect, with a lag, the fact inflation peaked around summer and fall of last year in major economies like the U.S. and eurozone and has since declined, as energy prices fell sharply and global supply-chain pressures eased Source WSJ

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