Stock bulls are feeling unsteady as inflation continues to run hotter than most expected by this point in 2023. The PCE Prices Index for January accelerated to a year-over-year rate of +5.4% from +5.3% previously. Stripping out food and energy, the so-called “core” rate, one of the Fed’s favorite inflation gauges, rose to +4.7% versus +4.6% in December.


At the same time, consumer spending was up +1.8% month-over-month. More concerning from the Federal Reserve’s perspective was an acceleration in wage gains, up almost +1% in January following a +0.4% increase in December.

Bottom line, there were few if any signs of “disinflation” in the report. The fact that wage gains seem to be picking up more steam is seen as a particularly big problem for the Fed’s inflation fight as central bank officials have pinpointed this as a key factor behind stubbornly rising prices.

Data recently circulating showed the typical US household is now paying an additional +$395 a month to purchase the same goods and services it did a year ago. It is equally a concern for businesses whose bottom lines continue to get squeezed but may face declining consumer demand as inflation pressures budgets.

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At the same time, the increase in consumer spending also feeds inflation and on the surface seems to defy the idea that inflation is stretching consumers thin. The +1.8% gain was the biggest increase since March 2021. The increase in spending is partially due to higher prices. However, when adjusted to account for inflation, spending was still up +1.1%, with gains coming from both the goods and services sectors.

There is a big debate over how much longer consumer spending will be able to continue at a healthy pace with some believing that shoppers are near their limits while others think Americans’ savings, wage gains, and credit cards could support another two or three quarters of free-spending habits.

Keep in mind, when the S&P 500 first pushed above the 4,000 level back in late-March of 2021 the 2-year Treasury was at 0.1% and now the S&P 500 is trading back down around the 4,000 level and the 2-Year Treasury is at close to 4.8%.

On the way up the 30-Year Mortgage was averaging around 3.35% now today its averaging around 6.5%. US gasoline prices were averaging about $2.89 per gallon back in March of 2021 and now they are averaging about $3.37 per gallon.

I could go on and on with higher food prices, etc… but what I worry about is prices and interest rates staying elevated for longer and eventually the US consumer experiencing more serious debt problems.

How that translates to the stock market can be heavily debated because as we all know the “economy” is not necessarily the “stock market” and they certainly do not have to react the same way.  

In fact, nany bulls believe recent data indicating a surge in inflation and spending in January is somewhat a fluke related to unusually warm weather and anticipate February numbers will show a return of “disinflationary” forces.

Data to watch 

ISM Indexes for both manufacturing and services on Wednesday and Friday, respectively, will be the first clues as to whether that thinking is correct. Data today includes Durable Goods and Pending Home Sales.

Investors this week are also anxious to see earnings from key retailers, including Ross Stores and Target on Tuesday; Dollar Tree and Lowe’s on Wednesday; and Costco and Best Buy on Thursday. The top highlights today are Occidental Petroleum and Zoom.

Hotter Than Expected Inflation Keeps SP500 Under Pressure

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