Analysis: COST

The January Personal Income & Spending report is another blow to the market given what it said not only about the consumer but the much hotter than expected headline and core PCE price indexes showed that far less progress has been made on inflation than previously thought.

This is the latest in a growing string of inflation data pointing to that, and it points to the Fed having to do more to get inflation back under control. By the numbers, the headline PCE price index for January came in at 5.4%, well above the revised 5.3% reading for December vs. the initial read of 5.0%. The core figure clocked in at 4.7%, above the expected 4.3% and hotter than December's reading that was revised to 4.6% from 4.4%.

Ahead of this data, the CME FedWatch Tool showed a 76% likelihood for a 25-basis point rate hike by the Fed at its March meeting with two more to follow at subsequent meetings. This January PCE data is likely to shift the probabilities around with the potential for a 50-basis point rate hike at the March meeting rising from 24% early this morning.

As that string of hotter than expected inflation data has been had, we've seen that probability rise from effectively 0% a month ago and the latest look shows that probability approaching 33%. Data in the coming weeks will help zero in on the real size of the next rate hike at the Fed's March meeting and whether Fed may be done raising rates at its June meeting... or not.

Cash Strapped Consumer

The market is not going to like what it learned in this report when it comes to inflation and the Fed, but it will also be concerned with the pace of personal spending in January outpacing personal income growth. On a month over month basis, personal income rose a weaker than expected 0.6% but personal consumption climbed 1.1% in January vs. December. Some of that can be explained by the stronger than expected January Retail Sales report we discussed with members earlier this month, but the concern is that spending continued to be fueled by consumers turning to credit, especially credit cards.

Given the inflation discussion above, borrowing rates tied to those cards are likely to sap even more consumer spending power, unless consumers tap the credit brakes and start paying down. Data from the Federal Reserve shows total credit card debt relative to after-tax income has grown from less than 6% in 2021 to 6.3% in December 2022.

But as borrowing costs have risen it means people will be paying larger shares of their income to repay that debt, having less disposable income to power the economy. That cash-strapped consumer is a positive for our shares of Costco (COST) , but it also means retailers with more traditional business models will continue to have a tough time.

The combination of these revelations has led equity markets to fall even further, and we could see a shoot first, ask questions later mood ensue today. Earlier this week, the market bounced off key resistance levels, but with more confirmation the progress we thought we had on inflation hasn't materialized, we will be watching several key levels on the S&P 500 including 3,940, 3900 and potentially 3,800 as well.

Rather than chase the market today, we will let the market digest today's news and look to potentially revisit our shopping list early next week. In the meantime, we'll let the inverse ETF holdings in the portfolio do their job as we digest comments later this morning from Fed Governor Philip Jefferson.