Stock bulls are feeling unsteady as inflation continues to run hotter than most expected by this point in 2023. The PCE Prices Index for January accelerated to a year-over-year rate of +5.4% from +5.3% previously. Stripping out food and energy, the so-called "core" rate, one of the Fed's favorite inflation gauges, rose to +4.7% versus +4.6% in December.

At the same time, consumer spending was up +1.8% month-over-month. More concerning from the Federal Reserve's perspective was an acceleration in wage gains, up almost +1% in January following a +0.4% increase in December.

Bottom line, there were few if any signs of "disinflation" in the report. The fact that wage gains seem to be picking up more steam is seen as a particularly big problem for the Fed's inflation fight as central bank officials have pinpointed this as a key factor behind stubbornly rising prices.

Data recently circulating showed the typical US household is now paying an additional +$395 a month to purchase the same goods and services it did a year ago. It is equally a concern for businesses whose bottom lines continue to get squeezed but may face declining consumer demand as inflation pressures budgets.

At the same time, the increase in consumer spending also feeds inflation and on the surface seems to defy the idea that inflation is stretching consumers thin. The +1.8% gain was the biggest increase since March 2021. The increase in spending is partially due to higher prices. However, when adjusted to account for inflation, spending was still up +1.1%, with gains coming from both the goods and services sectors.

There is a big debate over how much longer consumer spending will be able to continue at a healthy pace with some believing that shoppers are near their limits while others think Americans' savings, wage gains, and credit cards could support another two or three quarters of free-spending habits.

Keep in mind, when the S&P 500 first pushed above the 4,000 level back in late-March of 2021 the 2-year Treasury was at 0.1% and now the S&P 500 is trading back down around the 4,000 level and the 2-Year Treasury is at close to 4.8%.

On the way up the 30-Year Mortgage was averaging around 3.35% now today its averaging around 6.5%.

US gasoline prices were averaging about $2.89 per gallon back in March of 2021 and now they are averaging about $3.37 per gallon.

I could go on and on with higher food prices, etc... but what I worry about is prices and interest rates staying elevated for longer and eventually the US consumer experiencing more serious debt problems.

How that translates to the stock market can be heavily debated because as we all know the "economy" is not necessarily the "stock market" and they certainly do not have to react the same way.

In fact, nany bulls believe recent data indicating a surge in inflation and spending in January is somewhat a fluke related to unusually warm weather and anticipate February numbers will show a return of "disinflationary" forces.

ISM Indexes for both manufacturing and services on Wednesday and Friday, respectively, will be the first clues as to whether that thinking is correct.

Data today includes Durable Goods and Pending Home Sales.

Investors this week are also anxious to see earnings from key retailers, including Ross Stores and Target on Tuesday; Dollar Tree and Lowe's on Wednesday; and Costco and Best Buy on Thursday. The top highlights today are Occidental Petroleum and Zoom.

Warren Buffett Published His Highly Anticipated "Annual Letter to Berkshire Hathaway Shareholders" on Saturday. The letter has been an annual tradition for the 92-year-old “Oracle of Omaha” for more than six decades and it has become a must-read for investors around the globe. Mr. Buffett retained his sense of optimism in his annual letter to investors Saturday, saying he continues to believe in the resilience of the U.S. economy. “I have been investing for 80 years—more than one-third of our country’s lifetime. Despite our citizens’ penchant—almost enthusiasm—for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America.” Here it is all 144 pages!

Girl Dies in Cambodia from "Bird Flu" Health Officials Getting Concerned: The discovery of two cases of bird flu within the same family in Cambodia has highlighted the concern over potential human-to-human spread of the virus. However, it remains unclear whether the two cases were down to human-to-human transmission, or the result of both father and daughter having had close contact with animals infected with H5N1. Data from the WHO reveals that from January 2003 to 5 January 2023, there have been 868 cases of human infection with avian influenza A(H5N1) virus around the world, 457 of which were fatal. However, only six of these cases, and two deaths, occurred since the start of 2021. The worry here at home is that we are experiencing a massive spread of the avian flu, as we have killed more than +58 million chickens in the past 12-months. John Clifford a former chief veterinarian officer for USDA recently said, “it's everywhere. The virus is in all flyways across the Americas”. Dr. Rosemary Sifford, the USDA’s current chief veterinary officer said, in the current outbreak, wild birds carrying the virus are responsible for 84% of cases. J.T. Dean, president of Versova, one of the five largest U.S. egg producers in the US recently said, “We’re fighting an epic battle.” Source WSJ

With the Easy Money Gone, Executives Tighten Belts by Slashing Dividends: With their companies being squeezed by higher interest rates, tighter profit margins and an uncertain economic outlook that can put their credit ratings at risk, executives are being pushed to tighten their belts at the expense of their shareholders. So far this year, as many as 17 companies in the Dow Jones US Total Stock Market Index cut their dividends. Pressure may build for more to follow suit as revenue and profits decline — and as debt, as a proportion of earnings, grows. A wall of upcoming debt maturities is also increasing the need to retain cash on balance sheets. For credit investors, it’s a welcome change from the days when corporate executives opened the taps on dividend payouts and even loaded up on cheap credit to fund them. Data from S&P Dow Jones Indices shows that companies in the S&P 500 spent $564.6 billion on dividends in 2022, the most in data going back to 2000 and up from $511.2 billion in 2021. By keeping that cash on their balance sheets, companies can also stave off ratings downgrades that could make raising capital even costlier. Source Bloomberg

United Airlines Launches $100 Million Sustainable Fuel Fund: United Airlines last week launched a more than $100 million investment fund to support start-ups focused on the research and production of sustainable aviation fuel (SAF). The Chicago-based carrier along with inaugural partners such as Air Canada, Boeing, General Electric, JPMorgan Chase, and Honeywell have invested in the United Airlines Ventures Sustainable Flight Fund, it said. United said the fund was open to investment by companies across industries and would prioritize investment in new technology and "proven" producers. The global aviation industry is under pressure to reduce carbon emissions and find ways to meet the 2050 net-zero emissions target set by the International Air Transport Association (IATA) in 2021. Global airlines and aerospace manufacturers are betting on SAF, which is made in tiny quantities from feedstocks such as cooking oils and animal waste, and can cost two to five times more than conventional jet fuels. Source Reuters

Transport of East Palestine Soil, Water to Other States Prompts Backlash: Officials in Texas and Michigan are raising concerns about the water and soil transported from the East Palestine train derailment into their jurisdictions. Their comments come as East Palestine residents report diagnoses of bronchitis and other conditions which they attribute to the crash. The freight train was carrying hazardous materials, including the carcinogenic gas vinyl chloride, when it derailed on Feb. 3 and forced the company to release and burn the contents of several cars. "I and my team learned yesterday that firefighting water from East Palestine was going to be sent to Deer Park, which is one of the 34 cities in Harris County, for disposal," Harris County Judge Lina Hidalgo said at a press conference Thursday. "I learned about this not from a regulatory agency, not from the company, but from a member of the press, and that's unacceptable," Hidalgo noted, adding that she only learned Thursday that the water actually began arriving a week ago. Officials in Wayne County, where the U.S. ecology facility is located, said they're still not sure how the waste is being transported. Source Axios

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