Stock bulls might be stumbling a bit as more data adds to concerns that inflation still has a grip on the US economy. A much stronger-than-expected Producer Price Index showed a resurgence in goods and energy inflation was responsible for driving up wholesale costs in February. On a year-over-year basis, PPI was up +1.6% versus +0.9% in January, and core PPI was unchanged at +2.0%.

As mentioned yesterday, it can take a while - six months to a year - for wholesale prices to work through to the consumer level so this is not going to immediately drive up the numbers that influence Federal Reserve policy. However, it is the second month of “hot” producer prices and comes on the heals of two consecutive months of stronger than expected Consumer Price Index reads as well. The primary concern is not that inflation is going to start surging again, at least not at this point. Rather, Wall Street is worried that inflation has stopped slowing down, which could leave the Fed no choice but to keep rates on hold for longer than anticipated.

Remember, Fed officials have consistently said they want to see more evidence that inflation is moving toward the central bank’s +2% target rate. Meaning being stuck at current levels may not be good enough.

Bulls argue that inflation is not stuck, it is just not coming down as fast as Wall Street economists have been forecasting. So-called “core” PCE Prices, one of the Fed’s preferred gauges, has not ticked up in a year and stood at +2.8% in January 2024, down from +2.9% in December. Likewise, “core” CPI prices are also lower than where they ended last year.

Traders have slightly lowered their outlook for a June rate cut with odds now pegged at almost 55% versus over 58% earlier this week. Most still expect three or four 25 basis point cuts by the end of the year, so overall, there has not been a material shift in Fed expectations. Investors are highly anxious to see how Fed officials’ own outlooks for interest rate may have changed when the central bank releases its policy decision and updated economic projections next week. The central bank’s so-called “dot plot” - which maps where officials think the Fed’s benchmark interest rate will be in the future - was last updated in December and showed the fed funds rate ending 2024 at 4.6%. That works out to a reduction of -75 basis-points, or three cuts of -25 basis-points. The updated dot plot will be released along with the central banks latest policy decision next Wednesday following the Fed’s two-day meeting on March 19-20.

Most of next week’s economic data is housing focused, including the NAHB Housing Market Index on Monday; Housing Starts and Building Permits on Tuesday; and Existing Home Sales on Thursday.

Next week’s other headline events are stock related. The first is Nvidia’s GTC conference, which the company typically uses to introduce its latest and greatest chip technology. For what it’s worth, Nvidia’s stock price has nearly quadrupled since last year’s conference. While most remain extremely bullish the stock and AI in general, there are some concerns that heavy buying ahead of the next week’s conference is setting the stock up for a “buy the rumor, sell the fact” style sell-off. In the past, the event has typically given Nvidia’s stock a boost.

Next week’s other headline event will be Reddit’s IPO, which is expected to debut on the New York Stock Exchange on Thursday,  trading under the ticker symbol “RDDT.” It’s positioned to be the biggest IPO of the year so far and, if all goes well, hopes are high that it could help revive the sleepy IPO market. On the earnings front next week, things are pretty quiet with the key results being Chewy, General Mills, and Prudential on Wednesday; and Academy Sports, Accenture, Darden Restaurants, FedEx, lululemon, and Nike on Thursday. Have a great weekend!

Steven Mnuchin Wants to Buy TikTok:  Steven Mnuchin is putting together a consortium to try to buy TikTok, the former Treasury secretary said Thursday, as U.S. lawmakers stepped up the pressure on the popular social-media app. Mnuchin’s comments come a day after the House voted overwhelmingly to approve a bill that would ban the popular app from operating in the U.S. or force its Chinese owner ByteDance to sell off the company’s U.S. operations within about six months. I think the legislation should pass and I think it should be sold, Mnuchin said on CNBC. It’s a great business and I’m going to put together a group to buy TikTok. Mnuchin didn’t give details of who he was working with or how his group could raise the funds needed to buy TikTok. The House bill will now move to the Senate, where lawmakers signaled a more cautious approach on the legislation. President Biden has said he would sign the bill if it reached his desk, and the White House said Wednesday it hoped the Senate would take swift action. Source WSJ

America’s Plumber Shortage Cost the Economy $33 Billion: Despite paying above the national average, the pace at which the US is minting new plumbers is lagging retirements. The widening plumber deficit matters for households facing hefty charges to fix a leak and businesses trying to get new buildings completed on time and on budget. This shortage cost the economy about $33 billion in 2022, according to an analysis by John Dunham & Associates, a research company in Longboat Key, Florida, which projects the country will be short about 550,000 plumbers by 2027. The perception that plumbing is physically arduous dirty work with long hours is among the reasons younger people aren’t signing up. Industry executives say there’s no quick fix. Bolstering the plumber pipeline will require deep investment in recruiting and training, starting from middle school upward, says Ed Brady, chief executive officer of the Home Builders Institute. “We are going to have this for a long time. This is not a market cycle issue. This is a generational issue.”  Source Bloomberg

Corporate Defaults Happening at Fastest Pace Since Financial Crisis: More companies have defaulted on their debt in 2024 than in any start to the year since the global financial crisis as inflationary pressures and high interest rates continue to weigh on the world’s riskiest borrowers, according to S&P Global Ratings. This year’s global tally of corporate defaults stands at 29, the highest year-to-date count since the 36 recorded during the same period in 2009, according to the rating agency. Subdued consumer demand, rising wages and high interest rates, which hurt more indebted companies, had all contributed to the increase in the number of companies struggling to repay their debt, S&P said. “What’s going on is exactly what’s been going on since the Federal Reserve began to raise interest rates” in March 2022, said Torsten Slok, chief economist at investment group Apollo. “Default rates are rising . . . because higher interest rates continue to bite harder and harder on highly levered companies. Fourteen, or roughly half, of the companies that have defaulted across the globe this year were classified by S&P as “distressed exchanges” — agreements that typically involve creditors receiving assets worth less than the face value of their debt. Source Financial Times


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