US Close: Stock rebound continues, Fed’s favorite inflation reading hits highest level since 1983, Consumer Spending rebounds

US stocks are rallying as Wall Street anticipates central bank reluctance to go overly aggressive with tightening monetary policy, so they could provide a cushion for a growth hit that will stem the Russia-Ukraine developments. Even as Russian troops move in on Ukraine’s capital, risk appetite got a boost from Moscow’s signal that they could be ready to have talks with the Ukrainian government. President Putin is demanding that Ukraine surrender before discussions can happen, so it wouldn’t surprise anyone if talks don’t happen at all.

Investors are trying to assess how back-and-forth sanctions will weigh on risk appetite.  Russia will also respond with their own set of sanctions against Western nations.  Hard-hitting sanctions could put the Russian economy on a terrible trajectory, but that pain would be shared with Europe, so it seems that might be a last resort.  Kicking Russia out of the SWIFT system would make it very hard for Europe to pay for its energy and for many countries that need Russian wheat and other commodities that are vital to the semiconductor space.

Financial markets will remain on edge as this is just the beginning of the War in Ukraine, so the dip buying that occurred over the past two days will run out of steam.  Stock market volatility will not be going away anytime soon and if financial markets become convinced that the uncertainty that stems from Ukraine-Russia tensions will threaten global growth and intensify inflationary pressures, investors will hesitate to remain over exposed to risk.

The release of the Fed’s monetary policy report reiterated that interest rate hikes will soon be appropriate.  The report added that some supply bottleneck issues could remain for some time. Next week, Fed Chair Powell will deliver his semi-annual testimony to both the House and Senate.  After hearing from Powell, investors will have a better understanding if they can completely write off that half-point rate increase in March.

Inflation heats up

The Fed’s favorite inflation gauge hit the highest levels since 1983. The core personal consumption expenditure index rose 5.2% in January from a year earlier, inline with expectations and well above the prior 4.9% reading.  The month-over-month PCE Deflator rose 0.6% as expected and a tick higher from the upwardly revised prior reading.  The likely impact from the Russian invasion of Ukraine could deliver another wave of pricing pressures that might make policymakers a little more anxious in tackling inflation.

Inflationary pressures are not easing at all.  Fed’s Waller, Bullard and Bowman could support a half-point increase and if the March 10^th inflation report runs super hot, that could tilt the scales in that supersized rate hike.

Durable Goods

Business spending picked up in January as durable goods increased more-than-expected and the December reading was revised significantly better. The omicron variant impact was minimal in January and that should suggest the economy was looking very strong before geopolitical tensions became the dominant theme.

The Consumer

The consumer looked good in January as incomes remained steady, while spending picked up despite surging prices. If incomes are flatlining here, the consumer will not be willing to continue to tap savings going forward.

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