Stubborn Inflation Demands Recalibration of Investor Expectations

Barry Adams
24 Feb, 2023
New York City

Stocks accelerated decline on the final day of the week and benchmark indexes are set to report the worst weekly loss in ten weeks. 

The familiar worry of rate-path drove the market sentiment after the personal consumption expenditure price index accelerated in January from the previous month and from a year ago. 

The PCE index gets an outsized attention because of the Federal Reserve's use of this alternative measure of inflation. 

The index generally understates by a wide margin the inflation experienced by most urban households and the increase in this index only suggested that inflationary pressures are stronger than previously estimated. 

Benchmark indexes dropped between 1% and 2% on the worries that interest rates are likely to go higher and stay elevated for a longer duration. 

Moreover, the Federal Reserve may have to raise rates to restrictive level which may drive the economy into a recession. 

 

New Home Sales Rebounded In January 

The sale of single-family new homes increased 7.2% from the previous month in January to a seasonally adjusted annual rate of 670,000, the U.S. Census Bureau and Department of Housing and Urban Development reported Friday. 

Home sales declined 19.4% from a year ago in January. 

The median sales price of new houses sold in January was $427,500, lower than $430,000 a year ago and the  average sales price was $474,400, lower than $501,200 a year ago.    

The seasonally‐adjusted estimate of new homes for sale at the end of January was 439,000, representing a  supply of 7.9 months at the current sales rate.

 

Personal Income and Spending Increased in January

Personal income increased 0.6% in January and disposable personal income 2.0% and personal consumption expenditures or PCE 1.8%, according to estimates released by the Bureau of Economic Analysis on Friday. 

The closely watched consumption price index, a measure of inflation tracked by the Federal Reserve, rose at a faster pace from the previous month. 

The increase was the largest since August. 

The PCE price index and core index excluding food and energy both accelerated to 0.6% in January compared to 0.2% and 0.4% increases in December. 

On an annual basis the PCE index and core index accelerated to 5.2% and 4.7% from 5.3% and 4.6% respectively. 

Personal spending jumped 1.8% in January from the previous month, rebounding from a downwardly revised 0.1% fall in December. 

Personal spending jumped the most since March of 2021.  

After adjusting for inflation or price changes, real personal spending jumped 1.1%, rebounding from a 0.3% decrease in December. 

 

Bond Yields Advanced, Stock Indexes Dipped

The S&P 500 index decreased 1.2% to 3,962.55 and the Nasdaq Composite index declined 1.8% to 11,381.63. 

For the week, the S&P 500 index is set close down nearly 3% and the Nasdaq Composite index is likely to close down at 3.5% and book a second weekly loss in the last three weeks.   

The yield on 2-year Treasury notes increased to 4.83%, 10-year Treasury notes rose to 3.96% and 30-year Treasury bonds 3.90%. 

Crude oil increased 70 cents to $76.10 a barrel and natural gas futures added 8 cents to $2.50 a thermal unit. 

 

U.S. Stock Movers 

Carvana Company dropped 16.5% to $8.40 after the used car dealer reported a sharp fall in revenue and a surge in loss in its latest quarter. 

Carvana said operating revenue in the fourth quarter plunged to $2.8 billion from $3.7 billion in the previous year.

Net loss in the period surged to $809 million from $89 million or diluted loss per share rose to $7.61 from $1.02 a year ago.  

Wayfair Inc fell 1.7% to $37.69 after the company reported a decline in sales and larger loss in its latest quarter. 

Wayfair said revenue in the fourth quarter decreased 4.6% to $3.1 billion and net loss expanded to $351 million from $202 million and diluted loss per share rose to $3.26 from $1.92 a year ago.