Stock bulls are sticking close to the sidelines as they await the critical PCE Prices Index on Friday amid concerns that recent declines in inflation may have stalled.

Stubbornly high prices mean the Federal Reserve may have more work to do, including increasing interest rates higher than many have been penciling. "Minutes" released yesterday from the central bank's most recent meeting showed that "most" officials agreed it was time to slow rate increases to 25 basis-points in order to better manage the risks of tightening too much or too little.

At the same time, the minutes show that several officials still would have supported a 50 basis-point hike. Some officials expressed concerns about slowing or ending the hiking campaign too soon which "could halt recent progress in moderating inflationary pressures." Unfortunately, recent data indicates that the steady decline in inflation witnessed since last year has stalled as wage pressures and services inflation tied to housing continue to fan the flames.

This has in turn caused many bulls to reconsider their position that the Fed could end its hiking campaign at the March or May meeting . The PCE Prices Index on Friday covers January so it is likely to show inflation remaining steady or rising slightly, just like other inflation data for the month has indicated.

For those hoping that disinflation resumed in February, the first look at those numbers won't come until the next Consumer Price Index (CPI) which is scheduled for release on March 14, just ahead of the Fed's next FOMC meeting on March 21-22.

Uncertainties surrounding where inflation is headed and how high interest rates might climb from here makes it tough for investors to justify higher stock prices. There are also growing concerns that consumers are starting to feel more pressure from the higher prices for everything.

Keep in mind, consumer spending accounts for roughly 70% of the US economy. A downshift in spending is a key reason many Wall Street insiders still believe a recession is likely going to happen later this year or early 2024. The impact of consumer spending cutbacks was on display this week from both Home Depot and Walmart, which issued disappointing outlooks for the quarters ahead. It's of course possible that consumer spending moderates from here and recession is avoided. However, if growth levels out but higher than normal inflation sticks around, which is one variation of a "no-landing" scenario, the Fed will still want to keep rates elevated in order not to let higher inflation come back alive. And at some point, many believe that will inevitably lead to recession or at least an earnings recession where higher wages and higher costs of goods and slower consumer spending squeeze profit margins.

The most bullish case for stocks is a "soft landing" where inflation pulls back to the Fed's target rate and the economy maintains a moderate growth trajectory but economists increasingly view that a long shot. Geopolitical tensions between the West and Russia as well as China also complicate the situation even further as there is plenty of room for some sort of escalation that interrupts the global flow of critical commodities.

Today, investors will be digesting the Kansas City Fed Manufacturing Index, and the second estimate of Q4 GDP. Earnings highlights today include Block, Booking Holdings, Intuit, Keurig Dr Pepper, Moderna, and Warner Bros. Discovery.

Gas Prices Poised Could Rise Again as Sanctions on Russia Take Effect: Gasoline’s premium to crude has lagged behind that of its sister products, diesel and jet fuel, whose premiums have more than doubled and quadrupled respectively over the past two years. Some analysts said gasoline’s premium is poised to surge further because of a looming shortage of a petroleum product called vacuum gas oil, or VGO. VGO is essentially the sludge that remains after lighter and more valuable products are distilled by refiners out of crude oil. Complex refineries, like many in the U.S. and Europe, have the equipment to process VGO and turn it into gasoline. Simpler ones, like many in Russia, lack this capability. Until recently, Russia was the world’s largest exporter of VGO, and most of it went to the U.S. and Europe. Now Western sanctions on Russia’s exports of refined products, which took effect earlier this month and which halted most European imports of VGO, could reduce the capacity of the U.S. and its allies to make gasoline. The sanctions’ potential impact on diesel supplies and prices is widely recognized, but it pales in comparison with the possible consequences on those of gasoline, some analysts have said Source WSJ

Mortgage Rates Jump and Applications Plummet: Mortgage rates have risen sharply in recent weeks, reversing what had been a steady drop from nosebleed levels. One result, predictably, appears to be a stomping out of what little activity was starting to emerge in the housing market. That's one takeaway from the latest index of mortgage applications released by the Mortgage Bankers Association which recorded the biggest weekly drop, down -18% from the prior week in eight years. The index is now at its lowest level since 1995. At the beginning of February, the 30-year fixed rate was 6.19%. Since then, it has jumped almost a half percentage point to 6.62%, as of last week, according to the MBA. That's the highest since November. This time of the year is typically when purchasing activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected, said Joel Kan, the group's deputy chief economist. Source Axios

Fed Worried About Economic Risks from Prolonged Debt-Limit Talks: Federal Reserve policymakers at their most recent gathering discussed concerns about the potential for prolonged partisan wrangling over raising the federal debt limit to disrupt the economy and financial markets. Republicans and Democrats have staked out opposing positions on lifting the $31.4 trillion statutory debt ceiling, which was reached last month. The Treasury Department is currently applying special accounting measures to keep making payments on federal obligations, but that scope is expected to be exhausted within months. Fed officials said that one of the downside risks to the economy was “disruptions in the financial system and broader economy associated with concerns that the statutory debt limit might not be raised in a timely manner,” the minutes showed. Republicans, who have a narrow majority in the House, are demanding steep spending cuts in return for raising the debt limit. But President Joe Biden has called for a “clean” increase or suspension of the ceiling. Some Treasury market participants caution that worries over a payments default could see US government securities sell off, causing ripple effects in other markets, if the deadline to raising the debt limit is in view without a political compromise in sight. Source Bloomberg

More Parents Moving in with Adult Children at Younger Ages: One in four Americans aged 25 to 34 lived with parents or older relatives as of 2021, the fastest-growing segment in multigenerational households, according to data from Pew Research Center. Most of this group is adult children moving back in with their parents, but a significant number of older adults are moving in with millennials, said Richard Fry, a senior researcher at Pew. In 2021, 9% of multigenerational households were headed by a 25- to 34-year-old, up from 6% in 2001. Some parents aren’t waiting for retirement or urgent healthcare needs to move in with adult children, the Pew data suggests. Known as the reverse-boomerang effect, the move is often driven by changing attitudes about family life, high housing costs and challenges in finding affordable child care, the researchers said. Nearly one in five Americans lived in multigenerational homes in 2021, which are defined as two or more adult generations living under the same roof. Such arrangements were more the norm in the first half of the 20th century. But they fell out of favor as housing centered on the nuclear family and older Americans stayed healthier longer and had more money. After bottoming out at 12% of Americans in 1980, multigenerational living has made a comeback in recent years, particularly after the 2008 financial crisis and during the pandemic. Source WSJ

U.S. Homeowners Have Lost $2.3 Trillion In Value Since June Peak: The total value of U.S. homes was $45.3 trillion at the end of 2022, down -4.9% ($2.3 trillion) from a record high of $47.7 trillion in June. That’s the largest June-to-December drop in percentage terms since 2008. While the total value of U.S. homes was up +6.5% from a year earlier in December, that’s the smallest year-over-year increase during any month since August 2020. This is according to an analysis of Redfin Estimates on more than 99 million U.S. residential properties. The median U.S. home sale price was $383,249 in January, down -11.5% from a peak of $433,133 in May, and up just +1.5% from January 2022. Homebuyer demand slowed in large part because rising mortgage rates. The average 30-year fixed mortgage rate was 6.36% in December. While that’s down from the 20-year high of 7.08% in November, it’s roughly double the level from the start of 2022. Rates fell at the beginning of February, giving buyers some hope, but have since crept back up to December levels. Still, the total value of U.S. homes remains roughly +$13 trillion higher than it was in February 2020, the month before the coronavirus was declared a pandemic. Suburbs and rural areas have fared better than cities. The total value of homes in American suburbs rose +6.4% year over year to $25.4 trillion in December. By comparison, the value of urban homes climbed +2.5% to $10.8 trillion. Rural homes — which make up a relatively small portion of the housing market— had a total home value increase of +8.5% to $6.2 trillion. Source Redfin

Starbucks CEO Says Union Push Part of "Much Bigger" Social Problems: Starbucks’ outgoing CEO Howard Schultz has made it no secret that he doesn’t believe in labor unions—but now he has revealed he thinks the unionization movement gripping the coffee giant is a sign of wider social problems in America. “It’s my belief that the efforts of unionization in America are in many ways a manifestation of a much bigger problem,” he said. When Schultz re-joined the company last year, he spent months visiting with employees as part of a listening tour that helped him develop a new roadmap for the company, which he said had “lost its way.” “There is a macro issue here that is much, much bigger than Starbucks. I’ve talked to thousands of Starbucks partners, and I was shocked, stunned to hear the loneliness, the anxiety, the fracturing trust in government, the fracturing trust in companies, fracturing trust in family, a lack of hope in terms of opportunity.” Starbucks refers to its employees as partners. Schultz, who helped Starbucks embark on its rapid expansion in the 1980s and 1990s and almost ran for president in 2020, told CNN’s Poppy Harlow that he had returned to the company as interim CEO to restore its employees’ faith in the firm. Source CNN

America's Fastest Growing Hobbies: If you've been throwing axes, blowing molten glass into vases, and finishing the day off with pickleball, then you're just like everyone else. According to new data from Yelp, Americans have been searching for all kinds of ways to fill new chunks of leisure time. Yelp user data shows consumer interest in a wide range of hobbies – from active sports to arts and leisure activities – has increased in 2022 when compared to both 2019 and 2021. One of the most popular right now is pickleball. Interest in the game shot up by 275% from 2019 to 2022, according to changes in consumer actions such as viewing relevant business pages, sharing photos or posting reviews on Yelp. Pickleball was the fastest-growing sport in America last year, according to the Sports & Fitness Industry Association. Source Axios

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