This was a complicated week for markets as economic data continues to remain hotter than expected. In ordinary times, we might be pleased to see strong retail sales and lower-than-expected initial jobless claims. And yet, coupled with hotter-than-expected inflation and ever-growing personal debt, one would be reasonable to remain cautious. And that is where we find ourselves. The markets remained mostly flat despite concerns of further tightening by the Federal Reserve in the months ahead.
It was a week full of economic data and for the most part, it was good. Perhaps too good. As mentioned above, initial jobless claims were lower than expected on the back of the blockbuster jobs report a couple weeks ago. It seems despite the large layoffs announced in the technology sector, the rest of the economy is still in hiring mode. Additionally, retail sales remain strong, although we also learned that consumers added $394B in debt in the fourth quarter which represents the largest quarterly increase in twenty years. For the not-so-great news, the January consumer price index (CPI) reversed its downward trend which came as a surprise. And as if in sympathy, the producer price index (PPI) was also higher than expected. Further, the credit card delinquency rate and write-offs continued to move higher in January although not yet back to “normal” pre-pandemic levels. Inflation remains a tough nut to crack, which is why investors are now considering the possibility that the Fed will not just hike rates at its next FOMC meeting in March, but could also raise rate rates again in June.
In other news, I came across a rather amusing bit from Bank of America. We often place too much importance on analysts and their take on the markets. Appearances on CNBC and other financial media give credence to their authority and reputation. So, it came as no surprise when I read this week that the head economic analyst at Bank of America expects the S&P 500 to end the year at 4,000 unless it goes up to 4,600 or falls to 3,000. That’s right, the S&P 500 will close the year roughly where it is now unless it goes up 15% or falls 25% from here. Now that’s some serious forecasting right there.
Here’s another tidbit I didn’t realize was still happening. In March 2022, President Biden announced his administration would release 1 million barrels of oil per day from the strategic petroleum reserve with the aim of driving oil prices down. At the time WTI crude was selling for $99 per barrel. Since then oil has declined to a low of $71 in December 2022 and now stands at $80 today. It came as a surprise to me that we are still releasing oil from the strategic reserve. My understanding was that this was a temporary measure to bring down the price of oil. However, it was announced this week that another 26 million barrels of oil were being released which brings the reserve to its lowest level since 1983. Approximately 345M barrels remain. Since we hadn’t heard much about this program in recent months, I had assumed that the government was replenishing the reserves with oil in the $ 70s. That does not appear to be the case.
In closing, I want to point out something that is going to be obvious to many. Food inflation is out of control. Last summer the price of beef and chicken wings skyrocketed. Economists have reassured us that there was good reason for such price hikes. And yet this week’s CPI report highlighted that food prices remain a sore spot. In fact, food prices are up 10.1% year-over-year and increased sequentially from December to January. Those items seeing the biggest price increases year-over-year include breakfast cereal +15.0%, bakery products +15.4%, milk +11.0%, carbonated drinks +14.3%, margarine +44%, and bread +14.9%. But what about eggs you say? They’re up 70.1%. This brings me to the surprise of the week. The global bird flu has wiped out about 100 million poultry which has pushed the price of a carton of 12 eggs to a record $4.82 in January, up from less than $2.00 a year earlier. Meanwhile, the price of ground chuck has fallen to $4.64 from a 2022 peak of $5.12 last August. At the moment, a dozen eggs now costs more than 1 pound of ground beef. Now you know.Bruce J. Mason, MBA