Wentz Weekly Insights
The Fed and Nvidia

The S&P 500 fell last week for the second consecutive week, something not seen since October and comes after rising 15 of the prior 18 weeks. However, it was only a 0.13% weekly decline, although small caps did underperform with the Russell 2000 falling 2.08%. There was also a pickup in bond yields due to another hotter than expected inflation report – the 10-year Treasury yield rose 24 basis points to 4.32%.
It was a more uneventful week, with most focus on new economic data with February inflation and retail sales data. With markets reaction last week, there still appears to be a continued underlying worry about inflation. As the Fed Chairman Powell has repeatedly said, the path back to consistent 2% inflation will be bumpy.
After a steady deceleration through 2023, inflation has moved higher and surprised many in the first two months of the year. The latest inflation reading last week showed a 0.4% increase in price levels for the month of February and a 12-month inflation rate of 3.2%, slightly more than the 3.1% increase expected, according to the consumer price index. However, inflation over the past three months annualized is at 4.0%, accelerating from recent months and back to double the Fed’s target of 2%.
Energy prices bounced back in the month and drove some of the monthly increase, but it wasn’t all energy. Inflation excluding the volatile food and energy categories was still up 0.4% in February, up 3.8% from a year ago, and up 4.4% annualized over the past three months. Even more, inflation appears to remain sticky in the services sector. The index category that tracks this best, sometimes referred to as super core, rose 0.6% in the month, is up 3.9% over the past year, but up 6.4% annualized over the past three months.
The producer price index, an index on input prices at the producer level, suggesting an acceleration in prices to start the year as well. This index increased 0.6% in February, doubling the expectation.
At the same time, retail sales came in below expectations with a 0.6% monthly increase. This was expected to be a stronger increase due to a weak January, where sales were revised even lower to a 1.1% monthly decline. Overall, retail sales are up 1.5% over the past year, but adjusting for the 3.2% pace of inflation, sales are down nearly 2%.
Investors made adjustments on rate cut expectations after the latest round of data – the odds of a rate cut at the March and May meetings remained near zero percent while the odds of a cut at the June meeting fell to about 55%, down from 70% when the week started.
We should see more of how Fed policymakers interpreted the latest round of data after the next Fed FOMC meeting concludes Wednesday. This meeting will conclude with an updated Summary of Economic Projections – which is where each policymaker at the Fed give their projection on things like economic growth, inflation, and unemployment, as well as where they see interest rates at the end of the year.
The most recent projections released in December showed officials projected three rate cuts in 2024. With the latest data and recent comments from various policymakers, we wouldn’t be surprised if most projections moved to less rate cuts this year, perhaps two instead of three. Markets may react, as it is typical to see an increase in volatility around the FOMC meeting. Market probabilities of rate cuts are finally aligned with what the Fed has been projecting, coming without a negative reaction in stock prices – three rate cuts by the end of the year, although the probability of less has increased in recent days.
The other key event this week is Nvidia’s GPU Tech Conference where Nvidia CEO Jensen Huang will open with a keynote speech and a Q&A with analyst following the speech Tuesday morning. Investors are looking for the specs on its new AI chip, the selling price, and updates on supply chains where demand for the AI chips has far outpaced the supply so far. The chip market is highly cyclical – supply eventually catches up to demand and the market becomes oversupplied, prices are cut, and production declines until demand catches back up or supply declines. There may also be discussion on whether the industry is seeing AI applications used outside of large language models or generative learning.
Week in Review:
A mixed of stronger inflation readings and weaker retail sales for February had stocks pulling back slightly for the week with the major indices finishing as follows: Dow -0.02%, S&P 500 -0.13%, NASDAQ -0.70%, and Russell 2000 -2.08%. Bond yields finished higher over fading expectations on a rate cut in the next two meetings. The 2-year Treasury yield rose 26 basis points to 4.74% while the 10-year yield rose 24 bps to 4.32%. Crude oil finished up 4.1% for the week and its highest since November over improving sentiment after the IEA forecasted a supply deficit in 2024 and stronger demand. The dollar index rose 0.70%, gold fell 0.1%, and Bitcoin continued its recent strength, rising 1.62%.

Recent Economic Data

  • Consumer Price Index: The consumer price index rose 0.4% in February, as expected and increased 3.2% over the past year, slightly more than the 3.1% expected and 3.1% annual pace seen last month. However, the past three months annualized is 4.0%, double the Fed’s 2% target. Core prices were a little more than expected, the index excluding food and energy rose 0.4% and is up 3.8% from a year ago, more than the 3.7% expected but decelerating from 3.9% last month. Looking at the details, food prices were unchanged (up 2.2% from last year) while energy prices saw a 2.3% increase, though still down 2% over the past year. On goods, apparel rose 0.6%, used vehicles rose 0.5% (still down 2% over the past year) while new vehicles fell 0.1%, medical commodities rose 0.1%. The pace of increase in the shelter category ticked lower to 0.4% though still up 5.7% from a year ago. Medical care services fell slightly while transportation services saw another big increase of 1.4%, and remains one of the hottest categories up 10% over the past year. One of the more important index readings, “super core” which looks at services prices, rose 0.6% in the month and is still up 3.9% over the past year and up 6.4% over the past three months annualized.
  • Producer Price Index: Producer inflation was hotter than expected in February for the second consecutive month. The producer price index rose 0.6% in the month, double the 0.3% expected, and is up 1.6% from a year ago, accelerating from the annual rate of 0.9% in January. Core prices, excluding food and energy categories, rose 0.3%, also more than expected, and up 2.0% from a year ago. Much of the higher prices in February came from energy and goods, with just a 0.3% increase in services, although service prices are still up an annualized pace of 4.8% over the past two months.
  • Retail Sales: Retail sales saw a big decline in January, which some blamed to bad weather, but that was revised even lower to a 1.1% decline. February was expected to see a bounce back of 0.7%, but the latest data showed retail sales rose 0.6%, and 0.3% excluding vehicle and gasoline sales. Of the 13 major categories, 8 of them saw an increase in sales led by building supplies/gardening up 2.2%, vehicles up 1.6%, electronics up 1.5%, and declines in furniture stores, clothing, personal care, and online sales. The only figure on the services sector, bars and restaurants, rose 0.4% and still the hottest category over the past year with sales up 6.3%. Overall retail sales are up just 1.5% over the past year, and adjusted for inflation have declined nearly 2%.
  • Jobless Claims: Jobless claims were relatively unchanged in the latest week with new unemployment claims coming in at 209,000 for the week ended March 9. The four-week average stayed at 208,000. The number of continuing claims have been a different story, rising to the highest level since the pandemic in November, but falling about 100k since, and last week rose slightly to 1.811 million. The four-week average increased slightly to 1.799 million.
  • Industrial Production: Industrial production rose 0.1% in February after a decline three of the past four months. The small gain was due to a 0.8% increase in manufacturing, bouncing back after a big decline in January, a 2.2% increase in mining, also bouncing from a big decline in January, and a big 7.5% decline in utilities, which is driven by weather and the decline comes after a big increase in January from being a colder month.
  • Empire State Manufacturing Survey: The Empire state manufacturing survey index was -20.9, a massive miss on the downside versus expectations, falling deeper into contraction territory from -2.4 in February. This index has rarely been above zero over the past two years. The report noted the survey showed a significant decline in new orders and lower shipments, along with weakened labor market indicators and a moderation in the pace of input price increases but selling price increases that held steady.
  • Consumer Sentiment: University of Michigan’s survey of consumer sentiment reflected little change in March compared to the February survey with consumer’s feelings on the economy steady since the beginning of the year. The index came in at 76.5, down slightly from 76.9 in February. The index of the current conditions was unchanged in the month at 79.4 while the index of consumer expectations fell slightly to 74.6, down from 75.2. Meanwhile, the expectation for inflation over the next 12 months was unchanged at 3.0% with longer term expectations unchanged as well at 2.9% for the fourth straight month.

Company News

  • Southwest, American, and Delta: Airline stocks were off to a slow start last week after a presentation from multiple airline executives at a brokerage conference that included downward revisions to 2024 financials and comments of less Boeing plane deliveries. Southwest had a downward adjustment to its guidance on revenue per available seat mile and projecting a net loss in the quarter due to lower than expected leisure passenger volume. It also said its capacity will not grow as much as expected due to less deliveries of Boeing planes than anticipated due to the ongoing quality issues at Boeing, after Boeing told it to expect less deliveries this year. American is forecasting a bigger net loss due to higher fuel costs, while Delta’s update was better, reaffirming its profit forecast but not expecting deliveries of the 737MAX model until 2027, up from 2025.
  • Trouble at Boeing: Separately, Boeing was a big topic in the markets last week due to its ongoing quality issues. The NY Times reported the latest FAA audits of Boeing, which came after the midair occurrence of an emergency door plug blowout, found the plane maker failed 33 of 89 product audits and 97 cases of non-compliance were recorded. In addition, European regulators said they would pull the approval of Boeing’s planes if warranted.
  • TikTok’s Potential Ban: The possibility of a TikTok ban in the U.S. has resurfaced after the House passed a bill in a 352-65 decision that would ban the social media platform, which is owned by Chinese company ByteDance, unless it the company divest the business. It moves to the Senate but is expected to stall there with Senate leader Mitch McConnell hesitant on bringing it to a floor vote. One of the issues for the Senate is the bill singles out TikTok rather than a wider policy on restricting all apps that pose national security risks, as well as First Amendment concerns from several Senators. If it passes the Senate, President Biden has already said he would sign the bill.
  • Microsoft & Oracle Buying TikTok?: Shortly after the House passed the bill, a report said Microsoft and Oracle were considering acquiring TikTok and have been working with investment bankers. It adds that it would only purchase TikTok if it included its source code, which is the algorithms and data that generates the content for users and is the main asset that potential acquirers are most interested in. The uncertainty is if China would allow a US company to acquire the source code. In addition, ex-U.S. Treasury Secretary Steve Mnuchin said he is putting together a group of investors in attempt to acquire TikTok, saying it is important for TikTok to remain in business as a competitor to those like Facebook, Snap, etc, and shouldn’t go under control of a larger company to avoid antitrust issues.
  • US Steel Deal in Jeopardy: Shares of US Steel fell roughly 15% after President Biden said he expresses serious concern over the pending acquisition of US Steel by the Japanese steelmaker Nippon Steel. After the news, Nippon said it remans committed to the purchase despite the concerns. Also, Cleveland Cliffs, who was previously interested in a deal and made an offer, said it would consider buying the company in the $30s per share range.

Other News

  • #1 Oil Producer: In 2023, the US produced more crude oil than any other nation at any time, according to the Energy Information Administration. US crude oil production set a new record in 2023, producing a total of 12.9 million barrels of oil per day, more than the previous record of 12.3 million bbl/day set in 2019. In addition, the US was the top oil producer for the sixth consecutive year. The second and third largest oil producing countries last year were Russia and Saudi Arabia, producing 10.1 million bbl/day and 9.7 million bbl/day, respectively.
  • Strong Oil Demand: Separately, oil reached a new four month high after the International Energy Agency raised its oil demand forecast for 2024 while forecasting a supply deficit. It had previously forecasted a oil surplus for 2024 but adjusted its forecast due to stronger US outlook and an increase in fuels for shipping as ships take longer routes due to the tension in the key shipping route through the Red Sea.
  • Regulating AI: The European Union Parliament passed an act to regulate artificial intelligence, making it the first in the world to create regulation on AI. There was not much detail on how it regulates AI, but one source said it would categorize AI technologies into risk levels, some of which would be banned if considered “unacceptable.”

Did You Know…?

Record Long Yield Curve Inversion

As Raymond James noted, Thursday marked the 424th consecutive day the yield curve has remained inverted, the longest amount of time the curve has remained inverted, beating the previous record during the 1978-1980 period. The spread between the Treasury’s 2-year (4.59%) and 10-year (4.16%) yield was -43 basis points. An inversion of the yield curve occurs when short term rates are higher than longer term rates, and in this instance is measured by US government bond yields. An inverted yield curve has historically been an early sign of an economic slowdown/recession. For more on an inverted yield curve, see this link. The chart below shows the spread between the two since 1976 – above the black line is a positive spread and below is negative, indicating an inverted yield curve. The grey bars reflects recessions.

Non-Housing Interest Payments

New data from the Bureau of Economic Analysis and reported by Bloomberg show that households are paying as much interest on other kinds of debt (like auto loans, credit cards, and student loans) as they are on mortgages. Interest payments from all sources excluding mortgage interest payments increased to an annual rate of $573.4 billion in January, the highest on record even after adjusting for inflation. Meanwhile, the amount paid on annual mortgage interest in January was $578.3 billion. For comparison purposes, the amount of interest on non-mortgage payments was about $370 billion annually prior to the pandemic and fell to a low of roughly $220 billion annually during the pandemic when rates fell to 0%.

WFG News

The Week Ahead

The focus this week will be on the Fed and Nvidia/AI. The Fed’s policymaking committee, the FOMC, meets this week with a policy announcement on Wednesday at 2:00pm followed by a press conference with Chairman Powell. Also with this meeting is the release of updated Summary of Economic Projections. This is where all Fed official make short term and long term projections on things such as economic growth, inflation, unemployment, and interest rates. Nvidia and AI is the other big event with Nvidia holding its annual GTC conference where investors will look for updates on everything AI. The economic calendar shifts to the housing market with updates from the housing market index, housing starts and permits, and existing home sales. Other data releases include jobless claims and the Philly Fed manufacturing survey on Thursday. Earnings wind down but there will be focus on several high profile earnings like Micron on Wednesday and Nike, Lululemon, and FedEx on Thursday.