The Fed's going to have to come down hard on consumer demand to tame inflation
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Phil Rosen
Feb 28, 2023, 21:08 IST
Reuters
Good morning. Phil Rosen here, reporting from New York City.
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Economic data out Monday told us Americans are spending less on big-ticket items, with durable goods orders declining 4.5% in January from the prior month.
It marked a bigger drop than expected, but it does little to change that the American consumer is off to a strong start this year.
But remember, a strong consumer means high demand, which helps inflation stick around. That's the opposite of what the Federal Reserve wants.
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1. Higher-for-longer rate hikes don't bode well for the stock market. But odds are the Fed's going to be forced to keep pushing rates up, given the robust consumer demand to kick off 2023, according to Bank of America.
More rate hikes will ultimately stamp out an overly-enthusiastic consumer, and likely tip the economy into a recession. But if policymakers are serious about their 2% inflation target, that's what has to happen, the bank's analysts wrote on Monday.
"The strength in the January activity and inflation data suggests that the Fed might have to hike considerably further to find the point of pain for the consumer," BofA said. "Right-tail risks to the terminal rate are growing."
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As consumers start to feel pain from tighter policy, it'll put downward pressure on equities too. In JPMorgan's view, the stock market has yet to come to terms with that possibility.
"The bond market has been increasingly pricing-in a more hawkish scenario, but the equity market less so, with relative equity valuation at the high end of the historical range," JPMorgan strategists said Monday.
"Even though equities appear to be less concerned about the current restrictive policy environment, we believe the systematic risk is rising with every rate hike especially after ~15 years of global zero-rate policies," the strategists said.
What are the biggest risks you see this year to your portfolio? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
In other news:
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2. US stock futures edge lower early Tuesday, shaping up to log a monthly loss on the final day of February trading as investors continue to brace for interest rates to run higher for longer. Meanwhile, movie theater operator AMC's stock surged 23% Monday — a day before reporting earnings. Here are the latest market moves.
3. Earnings on deck: Target, AMC, and more, all reporting.
4. The manager of a $17 billion fund recommended buying these seven stocks right now. John Linehan of T. Rowe Price warned of "economic purgatory" and is eyeing a specific batch of value stocks. See the list of names that can boost your portfolio this year.
10. A top energy trader said oil demand could hit record highs later this year. That could push prices back above $100 per barrel, especially with crude inventories likely to tighten further, Vitol CEO Russell Hardy explained. Here's what to know.
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