Stock indexes are a bit wobbly ahead of today’s critical Consumer Price Index (CPI), which will be the first look at February inflation data.

Some minor rotation out of the tech sector seems to be ongoing, with chip maker stocks in particular under pressure. There’s nothing really alarming about this considering the run that chip stocks have already had this year. And heading into a report that has the potential to move the market, it makes sense that investors might want to remove some risk and book profits. There is also evidence that investors are shopping around for bargains among stocks in other sectors that may have been overlooked or remain undervalued.

Keep in mind that while the S&P 500 and Nasdaq are both up more than +7% so far this year, the Dow and Russell 2000 are up by less than half that, with each sitting on a gain of +2.7%.

At the same time, whether or not the tech sector is in a “bubble” remains a topic of hot debate and could be adding to the more “risk off” mentality ahead of CPI today. Remember, investors were largely blindside by stronger-than-expected January CPI, although stock markets did not witness the sell off that many feared.

However, a second month of hot data is less likely to be as easily dismissed by Wall Street. Economists are forecasting a slight decline in “core” CPI (strips out food and energy) to an annual rate of +3.7% from +3.9% in January. Headline CPI is expected to remain unchanged at +3.1%.

Today’s CPI read and the Producer Price Index (PPI) on Thursday are the last inflation data before the Fed’s policy meeting next week on March 19-20. Virtually no one expects a rate cut at next week’s meeting but the most recent data will shape central bank officials’ forecasts for economic growth, inflation, and importantly, the Fed’s benchmark interest rate.

The most unpleasant surprise for bulls would be if the Fed’s “dot plot” were to walk back rate cut expectations from the current outlook of three 25 basis point cuts.  On the earnings front today, the top highlights are Archer Daniels Midland (ADM), Kohl’s, and On Holding.  

Interesting to Think About... US Consumer Might Not Be In As Bad Of Shape As We Thought:  There's a ton of worry about the US consumer and how they are going to hold up in the wake of much higher interest rates. Interestingly, the Fed’s rate-hiking cycle has left many U.S. homeowners earning higher rates of return from their cash holdings than the effective rate of mortgages, according to a recent BofA note. In fact, around 90% of mortgage loans in the U.S. have fixed rates, according to the strategists. As a result, the effective mortgage rate is below pre-COVID levels at just 3.8%, despite the Fed’s tightening cycle driving current mortgage rates much higher than that, their note said. In other words, 90% of the mortgages are locked in at a rate sub-4%, while many people are now earning more than +4% on their money sitting in the bank, so for a lot of folks things really aren't all that bad. Let's also not forget, recent data shows that nearly 40% of all U.S. homes are owned mortgage-free. Source MarketWatch

Dealmaking Slowdown Leaves Private Equity with Record Unsold Assets: Private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn, as a sharp slowdown in dealmaking creates a crunch for investors looking to sell assets. The numbers, revealed in consultancy firm Bain & Co’s annual private equity report, show how rapidly the industry has grown over the past decade, as well as the challenges it faces from higher interest rates that have increased financing costs. Source GlobalPrivate Equity Report

What You Need to Know About Gold’s Curious Rally: Gold prices are hitting record highs, and Wall Street analysts say they have been caught off guard. Gold futures have notched gains for the past eight trading sessions and broken records in the past seven. The precious metal is traditionally seen as a haven in times of volatility and geopolitical risk. This time, its ascent is coinciding with investor optimism about the U.S. economy, which has sent riskier assets like stocks to new highs. The latest run-up came after inflation data late last month raised hopes that the Federal Reserve will cut interest rates this year. Lower rates make gold more attractive relative to assets such as stocks and bonds. But the magnitude of the move and gold’s climb before that call for more explanation. Gold’s biggest enemy is a rise in real yields. Yet gold has notched a +20% gain since the end of 2021 even as real yields have surged to about +1.8% from around negative -1% since the end of 2021, prompting a selloff of gold exchange-traded funds in the U.S. Central bank hoarding has likely been another tailwind.  Last year, those institutions snapped up more than four times the amount of gold that was ditched by ETF investors in the U.S. Greg Sharenow, head of commodities and real assets at Pimco, is among those who question whether gold’s latest rally can continue. Central banks have played a big role in its rise, and there is a risk that some will balk at buying more bullion at unprecedentedly high prices, he said. Source WSJ

Bitcoin’s Rally Is Creating Around 1,500 ‘Millionaire Wallets’ Daily: Bitcoin’s record-breaking rally appears to be creating around 1,500 new “millionaire wallets” daily, according to crypto analytics firm Kaiko Research. The original cryptocurrency has soared around 70% already this year amid exuberance over surging demand for US exchange-traded funds that were first allowed to hold the tokens in January. Even so, the pace of new millionaire wallets being created is lower than during the last bull-market run of 2021, when more than 4,000 wallets were reaching the million-dollar mark daily. The high for the current year was 1,691 wallets on March 1. The slower pace could be due to a few things. Fresh capital has yet to arrive in full force; large so-called whales are taking profits while Bitcoin hits new highs; whales are storing their holdings with custodians, rather than personal wallets, Kaiko said in a report on Monday. Source Bloomberg

Tyson Is Hiring New York Immigrants for Jobs No One Else Wants: For politicians in Washington and New York City, an unprecedented stream of asylum seekers presents an intractable problem with no easy answers. For companies like Tyson Foods Inc., struggling to fill unpleasant jobs with a US unemployment rate of 3.9%, this new population presents an alluring opportunity. Tyson is joining the nonprofit Tent Partnership for Refugees, which was founded by Chobani yogurt magnate Hamdi Ulukaya, with a plan to hire some of the 181,400 migrants that have come through New York City’s intake system over the past two years. The meatpacker already employs about 42,000 immigrants among its 120,000-strong US workforce. “We would like to employ another 42,000 if we could find them,” said Garrett Dolan, who leads Tyson’s efforts to eliminate employment barriers such as immigration status or the need for childcare. Tyson is constantly in search of workers to fill jobs in its factories — tasks like washing meat, placing the cuts into trays and doing a final inspection for bones. Dolan says the company expects about 40% of the 100,000 people in these roles will leave each year, a statistic he says is standard across the meatpacking industry. Source Bloomberg

US Senators Seek to Reallocate Government Spectrum to Boost 5G: Two top Republican senators are introducing legislation that would require some U.S. government-owned spectrum be auctioned off to boost commercial wireless 5G networks. Congress in March 2023 let the Federal Communications Commission's authority to auction spectrum lapse for the first time in three decades amid debate about what spectrum used by the Defense Department could be repurposed or shared. But demand for spectrum use is soaring, driven in part by advancements in drones, self-driving vehicles, moon missions and precision agriculture. Mobile U.S. wireless data traffic rose 38% in 2022, the largest-ever increase in mobile data traffic. The "Spectrum Pipeline" bill would require the Commerce Department's National Telecommunications and Information Administration (NTIA) to identify at least 2,500 megahertz of mid-band spectrum that could be reallocated from federal government use to non-governmental or shared use over the next 5 years. Source Reuters

Reddit Targets Valuation of Close to $6.5 Billion: Reddit and selling shareholders aim to raise about $750 million as part of the company’s upcoming IPO, according to a corporate filing on Monday. The company and some existing stakeholders plan to sell about 22 million shares in the range of $31 to $34 per share. Reddit filed its prospectus in February, and said it planned to go public on the New York Stock Exchange and trade under the ticker symbol “RDDT.” Of the 22 million shares being issued in the offering, Reddit is selling about 15.3 million, which would mean raising $520 million at the top of the range. Existing stakeholders, including CEO Steve Huffman, plan to sell a combined 6.7 million shares. Investors are closely watching Reddit’s offering, which will be this year’s first major tech debut and the first social media IPO since Pinterest went public in 2019. Reddit’s annual sales in 2023 were $804 million, a 20% year-over-year increase from $666.7 million in 2022, according to the company’s S-1 filing. It also recorded a net loss of $90.8 million for 2023, which was narrower than the $158.6 million net loss it logged a year earlier.   Source CNBC

Missing $164 Million Highlights New Risk for Mortgage Bonds: In January, investors including TPG Angelo Gordon, LibreMax Capital and Lord Abbett & Co. got a shock. The firms had bought into a bond deal arranged by Goldman Sachs Group Inc. in 2021 that financed the purchase of dozens of apartment buildings in San Francisco, one of the nation’s priciest markets. But by the end of 2022, the companies that borrowed the money had defaulted and the loan backing the securities was eventually sold off at a deep loss. Then Midland Loan Services Inc, a go-between that intervenes for bondholders when assets struggle, delivered more bad news: Investors weren’t going to get $164 million they had coming to them — for at least a little while, as questions surrounding the fate of the deal were worked through. Holdbacks can happen in commercial mortgage bonds, but this one was unusually large, big enough to expose multiple classes rated investment grade by Kroll Bond Rating Agency to possible losses. The step has drawn attention on Wall Street as a potential new X-factor risk in the $1 trillion market for commercial mortgage-backed securities. The real estate market is already contending with a historic downturn, but some investors now worry that servicers will make surprise decisions that end up significantly hurting their returns in deals. Source Bloomberg

Is There Really a Historic Level of Cash on the Stock Market’s Sidelines?: The stock market’s rally has already surpassed the expectations of most pundits. Some point to one factor as evidence the bull market could continue rolling higher: Investors have a pile of cash waiting to be put to work. However, that view may miss an important point, which is that compared with the amount of money in riskier investments (including stocks), that cash horde doesn’t look quite as big. Cash has built up in money market funds over the past two years as the Federal Reserve raised short-term interest rates to their highest levels since the onset of the financial crisis in 2008. Assets in the category have swelled to a nominal record of $6.1 trillion as of Feb. 29, 2024. With the Morningstar US Market Index up nearly 7% in 2024 and 25% over the last 12 months, some market pundits point to these record money market assets as a sign that stocks can extend their rally because the dollars in these funds could be reallocated into equities. According to Morningstar Direct, assets in money funds as a percentage of long-term assets peaked at 63% at the height of the global financial crisis in 2008, and they have averaged about 20% since 2011. At 23% of long-term assets at the end of January, US money market levels are not extraordinary, even after 2023′s cascade of inflows. Source Morningstar


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