Dow recovered & finished up 129, but decliners over advancers 5-4 & NAZ slipped back 68. The MLP index fell 3+ to the 228s & the REIT index dipped 1+ to 398. Junk bond funds were a little lower & Treasuries had limited buying, bringing slightly lower yields but still close to post Nov highs. Oil fell 2 to the 76s & gold was flattish at 1852 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
Pervasive inflation, a hot job market & a resilient consumer have put the option of a ½-percentage-point interest rate hike on the table when the Federal Reserve meets at the end of Mar. In separate interviews 2 speeches this week, 2 central bank policymakers indicated they are open to supporting a larger, 50-basis-point increase next month amid growing evidence that underlying inflationary pressures in the US economy remain strong. "At this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time," Cleveland Fed Pret Loretta Mester said yesterday. The Fed last month voted to raise its benchmark interest rate another qtr percentage point to 4.5-4.75% & signaled that a "couple more" increases are on the table this year. That followed a ½-point increase at their Dec meeting & 4 consecutive 75-basis-point moves. The central bank typically moves the federal funds rate in qtr-point increments. Mester, who is not currently a voting member of the Federal Open Market Committee, said she saw "compelling" economic evidence in Jan for a ½-point increase & indicated the Fed could accelerate the pace of rate increases again if conditions warrant. "It’s not always going to be, you know, 25 [basis points]," she said. "As we showed, when the economy calls for it, we can move faster, and we can do bigger at any particular meeting. And it’s going to be driven by how the economy is evolving." St Louis Fed Pres James Bullard echoed that sentiment after a presentation that he wants to bring the Fed's policy rate up to 5.375% as soon as possible. That implies that rates need to increase by about 75 basis points. "My overall judgment is it will be a long battle against inflation, and we’ll probably have to continue to show inflation-fighting resolve as we go through 2023," he said. Bullard, who is also not a voting member of the FOMC this year, said he would reserve judgment about what officials should do next month. "I wouldn’t rule anything out for that meeting, or any meeting in the future," he added. Their comments come amid a slew of hotter-than-expected economic data, including the strong Jan jobs report & a disappointing inflation report that pointed to the pervasiveness of high consumer prices. The Labor Dept reported on Tues that the consumer price index rose 0.5% in Jan, the most in 3 months. The annual inflation rate also surprised to the upside at 6.4%. That data has prompted some traders to reexamine their rate-hike expectations for the year, with a growing number of investors now betting the Fed could raise rates by 50 basis points next month. Some 21% of traders are bracing for a steeper rate hike at the Mar 21-22 meeting.
Sticky inflation opens door to steeper Fed rate hike in March
Unrelenting inflation is continuing to take a toll on Americans. About 27% of US households reported taking money out of savings in order to make ends meet, according to new data published in the Country Financial Security Index. About 54% who tapped their savings said they did so in order to pay for basic expenses like groceries & rent. "Inflation has shredded household budgets over the past two years, and not just when it comes to one-off discretionary expenses or special occasions, but for keeping up with day-to-day bills," said Greg McBride, chief financial analyst at Bankrate.com. Ms of Americans stashed away extra cash during the pandemic as a result of multiple stimulus checks, boosted unemployment benefits & limited spending options, but those savings are quickly dwindling. Americans have spent down about 35% of the extra money they accumulated during the pandemic as of mid-Jan, according to one estimate from Goldman Sachs. By the end of the year, the bank projected that households will have spent roughly 65% of that money. The data comes as Americans continue to confront the hottest inflation since the 1980s. The Labor Dept reported this week that the consumer price index rose 0.5% in Jan, faster than expected, & is up 6.4% over the past 12 months. While that is down from a peak of 9.1% recorded over the summer, it remains about 3 times higher than the pre-pandemic average. Consumers are increasingly relying on their savings & racking up credit card debt in order to pay for necessities. The personal savings rate tumbled in Dec to 3.4% from 7.5% one year ago as households pulled back on spending amid a cloudy economic outlook, the Commerce Dept reported last month. That compares to a savings rate of 33.8% in Apr 2020 at the height of the COVID-19 lockdowns and in the midst of the first round of stimulus payments. In the last 3 months of 2022, credit card balances increased by $61B to $986B, according to the New York Federal Reserve Bank's Quarterly Report on Household Debt & Credit published Thurs. That smashed the previous high of $927B recorded before the COVID-19 pandemic began. Total US household debt, meanwhile, climbed to a record $16.9T during the 4th qtr, an increase of 2.4% from the prior 3-month period.
Savings getting tapped by Americans to make ends meet due to inflation
The Intl Energy Agency's (IEA) exec director said that the biggest uncertainty facing global energy markets is the extent to which China rebounds from its extended closure. Currently, oil markets are “balanced,” Fatih Birol said. But producers are awaiting signals on forthcoming demand from the world's 2nd largest economy & largest crude oil importer. “For me, the biggest answer to the energy markets in the next months to come is [from] China,” Birol said, noting a major drop-off in the country's oil & gas demand during its pandemic lockdowns. In its latest monthly Oil Market Report published Wed, the energy agency said it anticipates global oil demand will pick up in 2023, with China accounting for a substantial portion of the projected increase. Oil deliveries are expected to rise by 1.1M barrels a day to hit 7.2M barrels a day over the course of 2023, with total demand reaching a record 101.9M barrels a day, the IEA noted. “China’s economy is rebounding now,” Birol noted. “How strong this advantage will be will decide the oil and gas market dynamics.” He added, “If it’s a very strong rebound, there may be a need that oil producers will increase their production.” The IEA chief said that OPEC+ countries, as well as other major oil producing nations such at the US, Brazil & Guyana, were poised to ramp up output to meet that demand, should it be needed. Asked whether Pres Biden's Inflation Reduction Act (IRA) — with its package of funding aimed at incentivizing clean energies — could stymie production increases in the US, Birol said this was unlikely. “I think it’s beyond the government’s policies. There is huge, huge money to be made,” he said, citing record profits posted by global oil & gas companies in the past year. Birol insisted that the IRA was playing a vital role in accelerating the global clean energy transition, once again hailing it as the “single most important climate action since the Paris agreement [of] 2015.” The IEA head said that the global energy crisis, prompted by Russia's invasion of Ukraine, was “supercharging” the transition to clean energies.
China’s rebound is the biggest unknown facing oil markets, IEA chief says
Gold closed with small loss, recovering from lows as the $ moderated from session highs. Gold for Apr closed down $1 to settle at $1850 per ounce, after touching $1827 during the day. Still, the drop came as economic data this week showed US inflation rose at a more than expected pace 6.4% in Jan, retail sales last month rose above forecasts, while the producer price index also topped expectations. The strong data came after the Federal Reserve signaled a more dovish turn at the end of its policy meeting on Feb 1, but now several central bank officials are calling for a more hawkish approach of moving rates higher & keeping them elevated longer to push inflation back to the 2% target level, bullish for the $ & yields.
Gold Closes Lower as the Dollar Rises on Expectations for Higher Interest Rate
Oil futures fell for a 4th straight session, with US prices down more than 4% for the week. Crude prices have fallen as supplies are plentiful & as global growth concerns return as the Federal Reserve & ECB seem poised to take interest rates even further into restrictive territory. US benchmark West Texas Intermediate crude for Mar fell $2.15 (2.7%) to settle at $76.34 a barrel, with prices for the front-month contract down 4.2% for the week.
U.S. oil futures fall more than 4% for the week
The interest rate from the Fed was elevated to a 21st century high of 5¼% in 2006-7. For the rest of this century it was well below that level. In the 20th century, it was generally near that level or higher & the economy was still able to grow. Currently the Fed is talking about taking the rate back up to 5¼ if not higher. Dow finished the week down 43.Dow Jones Industrials
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