Wall Street Breakfast: Future Of Online Speech

The state of inflation

Some major economic reports turned in surprisingly strong numbers last week – with January retail sales and CPI prints both beating economists’ estimates. Personal consumption expenditures, to be released at 8:30 AM ET, may continue that trend of a consumer continuing to spend even as economists predict a recession in 2023. Note that PCE is the Fed’s preferred inflation gauge, and follows January’s robust labor market data and yesterday’s downward revision of Q4 GDP amid lower consumer spending growth (more mixed signals?).

Snapshot: Personal consumption expenditures are expected to rise about 1.3% M/M vs. -0.2% in December, while personal income is expected to increase 1.0% M/M vs. +0.2% in the prior month. More importantly, the PCE price index is expected to climb 0.4% M/M, or 4.9% Y/Y, according to consensus estimates, with the core PCE price index forecast to advance 0.4% M/M, or 4.3% Y/Y.

A higher-than-expected number wouldn’t be good for equities, because that implies that the central bank has more hiking to do. Market participants currently put a 73% probability of a 25-bp rate hike to 4.75%-5.00% in March and a 70.3% probability of another 25-bp hike in May. Meanwhile, the chances of a fourth rate hike in June – to 5.25%-5.5% – are a little higher than 50%, according to CME’s FedWatch Tool. The S&P 500 Is In A Massive Death Zone, writes SA marketplace author Lawrence Fuller, citing recent figures on the economic and inflation fronts.

Why does the Fed like PCE? Compared to the headline grabbing consumer price index, which is based on a survey of consumers, personal consumption expenditures are based on a poll of businesses. CPI data also tends to be subject to fewer broad-based revisions, while PCE accounts for substitution effects. See additional differences and more in Manning & Napier’s recent article, Inflation 101: Your Guide To Understanding Inflation. (12 comments)

One year on

U.S. Treasury Secretary Janet Yellen has flagged Russia ending the war in Ukraine as “the most important thing” for the global economy amid devastating effects like the “weaponization of food and energy.” The warning at a meeting of G20 finance ministers and central bank governors came as China pushed for a ceasefire by publishing a 12-point proposal to end the fighting with the conflict entering its second year. The list was immediately criticized by top American officials, like National Security Advisor Jake Sullivan, who said it could’ve “stopped at point one, which is to respect the sovereignty of all nations.” It also called for the end of “unilateral sanctions unauthorized by the UN Security Council,” where Russia can make use of its permanent veto power, as Sino-Russian ties appear to be deepening. (32 comments)

Found dead

Famed billionaire Thomas H. Lee has died at 78, with the New York Post reporting that the leveraged-buyout pioneer was found dead of a self-inflicted gunshot wound at his Manhattan office. Lee, whom Forbes magazine listed as having a $2B net worth, started the firm that became Thomas Lee Partners in 1974, but parted ways with the company in 2005. Under his supervision, Thomas Lee Partners spearheaded several famous and highly profitable leveraged buyouts, including the 1985 $28M purchase of Sterling Jewelers, with sold just two years later for $210M – and is now a part of Signet Jewelers (SIG). He also led 1992’s acquisition of beverage giant Snapple for a reported $135M, which was sold to Quaker Oats – now owned by Pepsi (PEP) – for $1.7B in 1994. After leaving Thomas Lee Partners, Lee founded middle-market private-equity firm Lee Equity Partners, where he served as chairman at the time of his death. (20 comments)

Retirement analysis

How bad was 2022 for retirement accounts? Pretty awful. While 401(k)s rose in the fourth quarter, average balances finished the year down 23% to $103,900. That’s according to Fidelity Investments, the nation’s largest provider of retirement services with more than 43M accounts. Average IRA balances plunged by a similar amount, falling 20% Y/Y to $104,000, while 403(b) plans for public sector and non-profit organizations declined 19% to $92,683. Even more disconcerting is that nearly half of all retirees now expect to outlive their current savings, which may cause some regrets among those that chose to retire early because of the pandemic – only to be hammered by inflation. 2022 also ended with the lowest personal savings rate since 2005, while household debt climbed to its highest level in two decades. (5 comments)