Stock bulls once again push the S&P 500 to a fresh record closing high while the Dow and Nasdaq are within striking distance of setting their own new records. The move higher comes despite a stronger-than-expected Consumer Price Index (CPI). February headline CPI rose to +3.2% year-over-year from +3.1% in January. Remember, the bulls are wanting to see this number come down not move higher.

The main culprit was gasoline prices which surged almost +4% last month. The good news is that the Fed’s preferred “core” rate, which strips out food and energy, pulled back to +3.8% from +3.9%. Both reads were a bit higher than Wall Street economists were forecasting, but the market didn't seem to care.

Bulls believe the main takeaway is that the “disinflation” trend remains mostly in tact and supportive of the current outlook for the Fed to issue three or four -25 basis point rate cuts in 2024, starting in June.

Bulls are quick to point to Fed Chair Jerome Powell’s comment last week that the Fed was “not looking for better inflation readings than we’ve had. We’re just looking for more of them.” Bulls also point out that the first rate cut isn’t expected until June, meaning there are several more months of data between now and then.

Bears argue that February CPI indicates the slowdown in inflation is stalling out and supports the Fed’s decision to remain cautious on rate cuts. Longer-term, bears believe that a pause in the “disinflation” trend, coupled with tricky timing around the November election, will likely lead to fewer rate cuts than most on Wall Street are currently penciling.

The next key inflation read is the Producer Price Index (PPI) on Thursday. There is really no economic data of note today.

On the earnings front, highlights today include Dollar Tree, Lennar, and Williams Sonoma. It’s worth noting that Oracle earnings yesterday topped Wall Street expectations thanks to surprisingly strong demand for its cloud infrastructure. Sales grew +52% year over year, which Oracle credited to demand for its Gen2 AI infrastructure, which the company said “substantially exceeds supply.”  

The question that more Wall Street insiders are starting to debate is not so much whether AI-related companies can keep growing profits but rather how soon before that growth slows down? Meaning that it seems improbable that the massive earnings growth being generated by AI is sustainable, which could lead to disappointment in the quarters ahead if expectations remain overly optimistic. Lower profit gains could also dim the excitement surrounding AI and leave high-flying stocks treading water. 

Homebuyers Need to Earn 80% More Than in 2020 to Afford a House in this Market:  Factors beyond high mortgage rates are affecting housing affordability for many Americans, according to experts. Almost four years ago, a household earning $59,000 annually could afford a new mortgage without spending more than 30% of their monthly income and with a 10% down payment, according to a recent report by Zillow Group. That is no longer the case today. While the typical household in 2024 makes about $81,000 a year, up from $66,000 in 2020, wages have not kept up with housing costs. Since January of 2020, the typical mortgage payment on the typical home in the U.S. has nearly doubled, said Orphe Divounguy, a senior economist at Zillow. Nowadays, potential homebuyers need to make about $106,500 a year in order to afford the typical home today, an 80% increase from January 2020, according to Zillow. Read more at CNBC.

I Had No Idea... A recent report circulating from the Futures Industry Association (FIA), a global derivatives markets policy advocacy organization, shows that India accounted for a staggering 78% of all equity options contracts traded worldwide last year. The number of stock index options traded there reached 84.3 billion contracts last year, up 153% from 2022. As in the U.S. in 2021, a big bull market paired with new mobile technology making trading more accessible—and gamelike—has drawn in legions of small investors and social media influencers.   Source WSJ

Music Festivals Canceled This Year Reveal Rising Costs of Producing Large Events: After years of growth, some music festivals are in retreat. At least 10 shows in the US have been canceled this year, according to Bloomberg research. More budget-conscious consumers are a factor, but so are rising costs for staffing, stages and the performers. “Everything’s more expensive, including the artists,” Cameron Collins, founder of festival organizer Brew Ha Ha Productions, said in an interview. Tickets for April’s Coachella Valley Music and Arts Festival are still available for the second weekend after going on sale in January. Delaware’s Firefly Music Festival, which operated for 10 years featuring performers like Green Day and Dua Lipa, said on social media it is taking another year off and will return “when the timing is right.” The troubles mirror what’s happening in other consumer businesses, from theme parks to casinos, and reflect tighter budgets after a surge in post-pandemic travel. The cost of going to a multiday music festival can top $1,000, including lodging and travel expenses, not to mention $15 beers.  Source Bloomberg

Grocery Prices Falling but Dining Out Costs Continue to Rise: The cost of groceries saw another month of deceleration, with a =1.0% increase compared to last year, according to the latest Consumer Price Index. But the cost of dining out continues to outpace the cost of groceries. Meals at restaurants and bars cost diners +4.5% more compared to a year ago, although it was the smallest 12-month change since June 2021. "The reason why restaurants are raising prices is because people are still coming out in very, very large numbers to eat at restaurants; there's no reason for them to drop prices or to hold prices flat if every table's full," according to Wells Fargo agricultural economist Michael Swanson. Some grocery items are dropping in price compared to January, including pork chops (down -3.4%), frankfurters (-3.8%), fresh whole chicken (-2.9%), frozen fish and seafood (-2.6%), and fresh fruits (-1.6%). "Fruits and vegetables ... saw the largest decline since April of 2023" due to improvements in the supply chain, said Reed. But costs for some categories have remained stubbornly high. Egg prices are down -17% year over year, but up +5.8% compared to the month prior. "The price of eggs today are double what they were five years ago," per Swanson. In February 2024, a dozen large Grade A eggs cost $3.00, while the same carton cost $1.56 in February 2019. Frozen non-carbonated juices and drinks were up +27.2%, the largest yearly gain in any category across the BLS report. The prices of snacks also continue to increase, up +1.6% compared to a year ago. Swanson notes that once packaged goods increase their prices, "they almost never come back." Source Yahoo Finance

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Only 1 of 14 Partially Automated Driving Systems Deemed “Acceptable”: The Insurance Institute for Highway Safety is introducing a new ratings program to encourage automakers to incorporate more robust safeguards into their partial driving automation systems. Out of the first 14 systems tested, only one earns an acceptable rating. Two are rated marginal, and 11 are rated poor. “Most of them don’t include adequate measures to prevent misuse and keep drivers from losing focus on what’s happening on the road,” IIHS President David Harkey said. The Teammate system available on the Lexus LS is the only system tested that earns an acceptable rating. The GMC Sierra and Nissan Ariya are both available with partial automation systems that earn marginal ratings. The Ford Mustang Mach-E, Genesis G90, Mercedes-Benz C-Class sedan, Tesla Model 3 and Volvo S90 earn poor ratings, in some cases for more than one version of partial automation. Source IIHS.Org

Pentagon Scraps Plan to Spend $2.5 Billion on Intel Grant: The Pentagon pulled out of a plan to spend as much as $2.5 billion on a chip grant to Intel Corp., people familiar with the situation said, putting the onus on another federal agency — the Commerce Department — to make up for the shortfall. The move threatens to limit the total amount that Intel has been expecting to get in federal funding, setting up a contentious situation, said the people, who asked not to be identified because the deliberations are private. Beyond the defense money, Intel has been seeking incentives worth more than $10 billion from the Chips and Science Act. The defense funding was part of a spending package that President Joe Biden signed into law over the weekend, and it allocates $3.5 billion for Intel to produce advanced defense and intelligence-related semiconductors.  Source Bloomberg

More Americans Are Treating Their 401(k)s Like Cash Machines: A record share of 401(k) account holders took early withdrawals from their accounts last year for financial emergencies, according to internal data from Vanguard Group. Overall, 3.6% of its plan participants did so last year, up from 2.8% in 2022 and a pre-pandemic average of about 2%. Values in these accounts have risen substantially, in part because of a strong stock market and programs that automatically funnel money from people’s paychecks into their 401(k) accounts. These surging balances, however, have helped make more people comfortable dipping into their accounts when needed. Americans are dealing with conflicting financial forces. While hiring has been strong and workers’ earnings keep rising, the cost of groceries, child care and car insurance keeps climbing. More people are carrying heftier balances on their credit cards. Emergency distributions hit back-to-back record highs in 2022 and 2023, according to Vanguard, which administers 401(k)-type accounts for nearly five million people and published the data ahead of an annual report scheduled for June. Nearly 40% of those who took a hardship distribution last year did so to avoid foreclosure, compared with 36% in 2022. In 2023, more than 75% of hardship distributions totaled $5,000 or less, according to Vanguard. Source WSJ

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