CHRIS VERSACE: Good morning, Action Alerts Plus members. Let's discuss the economic data we're watching this week and its potential implications for the market and the portfolio. Let's also touch on the portfolio trades we made yesterday. But before we do, just a quick reminder that the AAP forum is open for business. And I've answered some of your latest forum questions just yesterday. Be sure to check it out. And of course, like they say, there is no such thing as a bad question.

Now let's get down to work with this morning's February CPI report. As I shared in a note with you, core CPI came in at 5.5% year over year. Down a tick from plus 5.6% in January and down a little bit from 5.7% in December. All in all, we would characterize that as very modest progress.

Now what the Fed isn't going to like at all is the month over month data found in the report, as it shows pretty clearly, core CPI is going simply in the wrong direction. In February, core CPI rose 0.5% month over month, and that compares to 0.4% the prior month and the range of 0.2 to 0.3% that we saw in November and December. Clearly, it signals the Fed has more work to do.

Also too, when we take a look at the headline CPI for February, it came in at plus 6% year over year. Now, while it continues the month over month declines we've been seeing really since inflation for headline CPI peaked in the middle of 2022, what the headline number and even the core number have in common is they are still quite a distance away from the Fed's 2% target. Simply, this tells us that the Fed is going to have to do more.

However, this is where we may have a problem, a disconnect, if you will, between what the Fed is likely to do and what the market thinks it may do. What I'm referring to here is what we can see in the CME FedWatch Tool. The initial reaction by that tool shows the likelihood of a 25 basis point rate hike next week at more than 82% following this morning's fresh inflation data. It also shows a prospect of the Fed doing nothing at that meeting at around 17%.

Now we go out another month. We look at the May meeting. It suggests that the Fed is going to do another 25 basis point rate hike. Now that's pretty consistent with the notion that the Fed has to do more to tame inflation. However, in the wake of the Silicon Valley Bank debacle, that same CME FedWatch Tool is also showing the Fed will do a 25 basis point rate cut at its June meeting and another one at its July meeting.

When we see this, the odds of the Fed flip-flopping so quickly, it's just not something that they're likely to do. And it tells me that the market is very confused about what it thinks the Fed is really going to do. What we will do is simply stick to the data. And as I suggested to you a few minutes ago, the core CPI reading for February is moving in the wrong direction. And it tells us that the Fed is going to have to do more. And therefore, the odds of that rate cut scenario playing out, that looks rather low.

This means that the market is more likely than not once again going to have to readjust its expectations for where the Fed funds rate is going. We saw this last week when Fed Powell testified, saying that there could be a 50 basis point rate hike on the table in March, and the markets simply did not like it. You could call it a bout of indigestion, but the reality is that they traded off rather hard.

Now we're going to continue to monitor the CME FedWatch Tool throughout today and again tomorrow because we have the February producer price index report. What I would caution you though is that there are no Fedheads making the rounds this week or even early next week because the Fed is in its pre-meeting blackout period. This means the data itself will be driving the market. And that is going to keep us on the bench, at least until we have a chance to examine and digest the February CPI report and its implications.

Again, that report is out tomorrow morning around 8:30 AM. The consensus has headline CPI rising 5.4% year over year. That's down from 6% in January. But again, here too, when we look at the core PPI, it's only expected to inch lower to 5.2% on a year over year basis. A modest decrease compared to January's 5.4%.

Now tomorrow, we also have the February retail sales data. Setting the stage for that was the Mastercard SpendingPulse report for February that was out last week, and it showed continued strength by the consumer in retail ex auto. We're going to size that report up against what we learned tomorrow and the 6.4% year over year increase found in the January retail sales report. I didn't want to get myself too confused there. A lot of numbers. We'll try to keep it straight.

Now when we think about the retail sales report, let's remember that retailers are getting closer to more normalized inventories after the holiday season. This means we are likely to see the aggressive use of sales and discounting start to fade. We could see some of this show up in the February retail sales report, particularly for clothing and department stores, but it also means that deflationary push is likely to fade as well. Again, because of the use of discounts and aggressive sales are likely to fade.

This also means that we're going to see retailers kind of get back to business, focusing on margins and their bottom line profits. From our perspective, the data has shown us that consumer debt levels continue to climb, and more dollars are indeed going to service that debt. We continue to see the consumer being selective, and we will continue to position the portfolio to match that part of the economy.

Now quickly, let's turn to yesterday's trades. We use the strength during the day to close out our position in 4-rated McCormick. No surprise. We've been pretty clear that we were going to do that. What did we do with the proceeds? Well, we use some of them to add to Marvell shares as they hit a key support level, one that we laid out in our note when we pull them up from the bullpen.

Our plan with Marvell shares is to chip away at the position size. Why? Because we like the continued prospects for the shares. What's driving that? Continued growth in data traffic and its implications on the need for digital infrastructure. We also scooped up more shares of Clear Secure yesterday after the move lower from the last few days.

Why did we do this? Well, let's look at what we saw in the last few days. According to the Mastercard February SpendingPulse data, travel spending, particularly on airlines, remained very strong during the month. And the latest TSA travel data continues to reaffirm that more people are traveling, particularly by air. All of that are positives.

To that, we can add what we learned last night from United, where it said that it continues to see a strong operating environment in both the current quarter for both bookings, as well as revenues. It also said that it expects that to continue into the second quarter. For us, that's a very positive backdrop for the shares of Clear Secure as it continues to grow its footprint, not only with existing airport partners, but as it adds additional ones.

Now longer term with Clear Secure, we do want to see the company move beyond the airport market with its digital identity offerings. But in the near term, it still has ample room to run with that market alone. And folks, that is our rundown for today. Be sure to tune in tomorrow when JD Durkin and I answer some of your latest questions regarding the portfolio, the economy, and some other things.