This Week's Topics
Consumer Sentiment Dips Amidst Inflation Concerns
Consumer sentiment in the United States has declined, with the Consumer Confidence Index falling below expectations to 104.7. Additionally, the gauge forecasting sentiment six months ahead dropped to 73.8, a concerning sign historically associated with impending recessions. The primary cause of this pessimism is attributed to soaring costs, particularly in housing and borrowing. Mortgage rates have doubled since the pandemic, while home prices surged by 40%, severely impacting affordability. Furthermore, inflation numbers reported by the government may be understated due to omissions in calculations, with borrowing costs for items like automobiles excluded from the Consumer Price Index (CPI). Consequently, the true inflation rate could be significantly higher, exacerbating financial strain on the average American.
On the other hand, February's inflation data matched expectations, aligning with the Federal Reserve's forecasts. The personal consumption expenditures price index, excluding food and energy, rose by 2.8% year-over-year, while the headline PCE reading, including food and energy, increased by 2.5%. These figures, in line with estimates, suggest that the Fed may not implement immediate interest rate cuts, as it closely monitors core inflation indicators. Core PCE inflation has consistently exceeded the Fed's 2% target, indicating persistent inflationary pressures. While these numbers are not surprising to market participants, they underscore the ongoing challenge of managing inflation amidst economic uncertainty.
Source: Barron’s, CNBC
The Economic Effects of the Baltimore Bridge Collapse
The collapse of the Francis Scott Key Bridge in Baltimore, Maryland, following a collision with a cargo ship, has triggered concerns about its economic repercussions. Transportation Secretary Pete Buttigieg acknowledged the enormity of the reconstruction project, affirming that it won't be swift, inexpensive, or straightforward. President Joe Biden pledged full federal funding for the bridge's rebuilding, although the timeline remains uncertain. Christian Roeloffs, CEO of Container xChange, underscored the importance of resilient supply chain management amidst such disruptions, advocating for contingency planning and flexible strategies to mitigate unforeseen events.
Analysts predict that while the bridge collapse won't devastate the economy, it will create significant challenges. The port of Baltimore, a vital hub for U.S. auto imports and a substantial contributor to East Coast container volume, plays a pivotal role in the nation's supply chain. Ford's CFO, John Lawler, anticipates the need for supply chain diversions, potentially lengthening transit times and complicating logistics, leading to production slowdowns and revenue declines for automobile companies and other businesses reliant on the port. Small businesses, particularly those solely dependent on the port, face acute challenges, with significant implications for workers and local economies, as daily wages totaling approximately $2 million are at risk.
While the immediate impact may be somewhat mitigated due to the timing not coinciding with peak seasons, the long-term consequences remain uncertain. Congestion in alternative ports and disruptions to manufacturing processes and retail supply chains could persist until the bridge is rebuilt. Investors are advised to monitor developments closely, recognizing the broader economic implications as efforts to clean up and reconstruct the Francis Scott Key Bridge unfold.
Source: Bloomberg Markets, MarketWatch
Anticipation For The Personal Consumption Expenditures Data
The personal consumption expenditures report or PCE, reports the amount that each U.S. household is spending on goods and services. PCE is reported and calculated each month and in March it will be reported on Friday the 29th. Kim Forrest, Founder and CIO of Bokeh Capital, joined Bloomberg to talk about this and its potential effects on the market. “I think this is a tread water sort of weak because we are all waiting for the PCE, which we can’t trade on until Monday. So it's gonna be kind of an upward bias the next couple of days because we’ve traded lower.” The market will be getting a crucial piece of the inflation puzzle on Friday with the PCE numbers, but the market will be closed due to good friday, this is going to make the opening of the market on Monday extremely choppy and volatile.
According to analysts at the Wall Street Journal, headline PCE is expected to have risen 0.4% last month, this would be a faster pace than January's 0.3%. The annual rate is estimated to have risen 2.5% in the month of February, up from 2.4% last month. Core PCE, the headline rate minus food and energy sectors, is expected to advance 0.3% in February, lower than January's increase. Year-over-year core inflation is expected to stay stagnant at 2.8%. Increases in PCE are indicators that inflation is still increasing, these increasing numbers are causing some panic among Wall Street investors as it shows that the Fed’s plan for rate cuts may get pushed back. Essentially these numbers don’t bode well for hopes of low inflation. We won’t really be able to tell what the market thinks of these numbers until trading action resumes on Monday, but the numbers show that the market should decline to start the week as people have to reevaluate their estimates on inflation and the state of the economy.
Source: MarketWatch, Bloomberg Markets
Robinhood Unveils Their New Credit Card, Is It Worth It?
Robinhood has launched its new "Gold Card," aiming to expand beyond its reputation as a commission-free trading platform. This credit card offers attractive perks, including 3% cashback on all purchases and 5% back on travel, with no annual fee or foreign transaction fees. However, the card is exclusively available to Robinhood Gold members, costing $5 per month.
The company's acquisition of credit card company X1Inc last year underscores its commitment to this venture. While the card's benefits, such as the ability to transfer cashback into investment or retirement accounts, appeal to existing Robinhood users, some analysts warn of potential drawbacks. Concerns include the monthly fee for Robinhood Gold membership and the temptation to trade impulsively with cashback rewards integrated into the platform. Despite the card's allure, individuals should carefully consider their financial situation before deciding to apply.
Source: MarketWatch, Bloomberg Markets
Consumer Confidence Comes In Under Estimates Due To Inflation Worries
With the Fed still planning to cut rates and the stock market reaching new all-time highs, you would think that American citizens currently have an optimistic outlook on the future of the economy, it appears however that you would be wrong. The Consumer Confidence Index slipped down to the level of 104.7 this month, Wall Street analysts were estimating a rating of 106.5-107. In addition to this Jeffry Bartash of Barron’s reported, “A confidence gauge that looks ahead six months, however, declined to 73.8 from 76.3 in the prior month. Historically readings below 80 in the expectations index often signal a forthcoming recession. But it’s dipped below that mark repeatedly since 2022 even though the economy has kept expanding at an above-average speed.” So, the question becomes, what is the cause for the poor outlook that Americans have right now?
The answer is the cost of capital, or the cost of lending. Randall Forsyth of Barron’s wrote, “Due to the sharp rise in mortgage rates—30-year fixed-rate loans have jumped to about 7% from a historic low of about 3%—the cost of homeownership in the CPI has more than doubled since the pandemic, the paper’s authors find. That’s because home prices have jumped 40%, and mortgage rates, more than 140%.” There is also evidence that the inflation numbers being reported by the government are lower than they should be due to omissions being made in the factoring. Forsyth said the following while discussing a Harvard academic paper on the topic, “The paper also discusses the omission from CPI of borrowing costs for automobiles, which are almost always financed. Adding those finance expenses, rather than just the headline costs for car buyers, would have further increased inflation measures. If both personal interest payments (from auto loans, credit cards, and other consumer credit) and the higher cost of homeownership were accounted for in the CPI, the year-over-year inflation rate last November (when the study was done) would have been 9%, three times the reported 3% increase in the cost of living, the authors find.” This is the reason for the pessimistic outlook on the economy, the general population is currently getting hammered by high interest rates and inflated prices. The graph below from University of Michigan polls show the decline in consumer sentiment:
Essentially, high interest rates, home and gas prices, and prices in general have been absolutely crushing the working American, this is the reason for the low consumer sentiment. Bartash summed it up with “inflation is still running at excessively high levels and gas prices have risen to give Americans more to worry about. The pending presidential election has also made people anxious, polls show.”
Source: Barron’s
Inflation Inches Up: Fed's Focus on Core Measures Keeps Rate Cuts at Bay
In February, inflation matched expectations, following the path predicted by the Federal Reserve. This alignment likely means the Fed won't consider immediate interest rate cuts, as indicated by a key measure it relies on. According to data released by the Commerce Department on Friday, the personal consumption expenditures price index, excluding food and energy, rose by 2.8% compared to the previous year, with a 0.3% increase from the previous month, exactly as forecasted by Dow Jones. At the same time, the headline PCE reading, which includes the volatile food and energy costs, showed a 0.3% increase for the month and a 2.5% increase over a 12-month period, perfectly in line with estimates.
While both indicators play a significant role in guiding the Federal Reserve's decisions, the focus on core inflation is particularly emphasized as a better predictor of long-term inflation trends. Core PCE inflation, which excludes volatile food and energy prices, has consistently remained above the Fed's 2% target for the past three years. The latest data, while not surprising, highlight the persistence of inflationary pressures. In the CNBC article, “Key Fed inflation gauge rose 2.8% annually in February, as expected,” Jeff Cox quotes Victoria Greene, chief investment officer at G Squared Private Wealth, saying, “Nothing really super surprising. Obviously not the numbers the Fed wants to see, but I don’t think this is going to catch anybody off guard when they come back to work on Monday,” Greene noted that while the figures may not represent an ideal situation, they are unlikely to surprise market participants, especially after the Good Friday holiday break. She predicts that there will be a quick shift toward labor market indicators to gain further insights.
For those unaccustomed to economic terminology, “Inflation” refers to the general increase in prices of goods and services over time, leading to a decrease in the purchasing power of money. The “Federal Reserve” is the central bank of the United States, responsible for making monetary policy decisions and regulating the country's financial system. “Interest rate cuts” occur when the central bank reduces the cost of borrowing money, often used to stimulate economic growth. The “personal consumption expenditures price index” measures changes in the prices consumers pay for goods and services, excluding food and energy. “Core inflation” reflects changes in prices of goods and services, excluding the more volatile categories of food and energy.
Source: CNBC
Upcoming Events
Wednesday, March 27: Initial jobless claims, GDP (2nd revision), Chicago Business Barometer (PMI), Pending home sales, Consumer sentiment (final)