The Economy Is Heating Up | Morning Express | 2/16/2023

Posted: Feb. 16, 2023, 9:13 a.m.

E-mini S&P (March) / E-mini NQ (March)

S&P, yesterday’s close: Settled at 4158.25, down 12.75

NQ, yesterday’s close: Settled at 12,730.00, up 99.00

Fundamentals: A slew of economic data tells us the economy is heating up, and the Atlanta Fed’s GDPNow model for Q1 was revised higher to 2.4% yesterday from 2.2% (as of February 8th). This comes after Retail Sales data yesterday for January confirmed the consumer is not only resilient but strong, with headline coming in at +3.0% m/m, the best in a year, versus +1.8% expected and Core at +2.3% (ex-autos) versus +0.8% expected. One may argue this is a notional amount; people are spending more and getting less due to inflation. We believe this argument has less validity, given we must learn to live in this new inflationary environment. Furthermore, inflation has leveled off in recent months but shows signs of reinvigorating. Of the categories, Department Store Sales soared by 17.5% m/m, after falling -6.5% during the holiday season in December. Right behind it was Eating and Drinking, which jumped by 7.2% m/m after a flat November. The world is different than it was a decade ago, and we have discussed this before; people can buy what they want, when they want, and have it delivered within 24 hours. In this ever-connected, technology-driven world, people now use the Thanksgiving through New Year's timeframe to finally settle down. Therefore, we believe the slowing economy during that period, which the Fed was credited with, may have actually been arbitrary due to evolution. With people spending at Department Stores, working back in the office, and travel companies citing strong demand, not only is this not the activity of a slowdown, it leads to added spending while out and about. For us, the cherry on top is low credit card delinquencies, as seen in the chart below, an ever-tightening job market, and the early signs of a rebound in housing. Just yesterday, the NAHB Housing Market Index beat expectations at 42 versus 37, signaling decisively less negatively than forecast. Lastly, pundits cite a decrease in the savings rate, but ultimately, it’s the built-up excess savings. Goldman Sachs recently said Americans have spent down about 35% of their extra savings accumulated during the pandemic as of mid-January, and by the end of the year, they will have spent down about 65%.

Today brings more data to digest at 7:30 am CT. At the forefront is PPI, and producer prices are a leading indicator for consumer prices. U.S. PPI for January is expected to cool y/y with headline slipping to 5.4% from 6.2% and Core to 4.9% from 5.5%. However, m/m is expected to rebound to +0.4% and 0.3%, respectively. Weekly Initial Jobless Claims have been watched closely for any queues the labor market is beginning to loosen. The report two weeks ago hit the lowest level since last April at 183k, but last week picked up to 196k. Today is expected at 200k, a level we use to judge strength or weakness. Fresh Philly Fed is also due and on the heels of better NY Empire State Manufacturing. It is expected at -7.4, though a worsening, it would be the best level in five months. Rounding out the morning deluge is January Building Permits.

We then get a barrage of Fed speak. Cleveland Fed President Mester at 7:45 am CT, St. Louis Fed President Bullard at 12:30 pm CT, Fed Governor Cook at 3:00 pm CT, and others who may not be listed on schedule.

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