Wall Street doesn’t have much time to digest this week’s market-moving news — including Friday’s jobs report and the sudden collapse of Silicon Valley Bank — before it has more economic data on its plate. Most important of the incoming slew of reports is the consumer price index (CPI), which calculates the average change over time in prices that shoppers pay for goods and services and is slated for Tuesday. Investors want to see a definitive downturn in the rate of price increases on an annual basis to show the Federal Reserve’s strategy to beat inflation is working. The CPI increased 0.5% in January, which translated to an annual gain of 6.4%. Economists surveyed by Dow Jones had been looking for respective increases of 0.4% and 6.2%. A slower increase for February is ideal. However, we don’t want to see a negative number on an annual basis. Disinflation is the goal, not deflation. Deflation means costs are going down every year. Disinflation means prices are still rising, only at a slower pace. We want the latter to get inflation back down to a 2% annual rate. Deflation is worrisome because if consumers expect prices to fall, they are less incentivized to spend — why buy now when you can get it cheaper later? — and consumption accounts for nearly 70% of the U.S. economy. The producer price index (PPI) for February, which calculates the change in selling prices received by producers of goods and services, is out on Wednesday. The PPI doesn’t influence the Fed’s decisions as much as the CPI. But PPI readings can predict the direction of future consumer price readings. Also on Wednesday is the February retail sales report, which will provide valuable insight into where buyers are focusing their spending and which industries are seeing sustained demand. The February housing starts report on Thursday is important for a couple reasons. First, a shortage of supply has helped fuel inflation and make buying a home less affordable. High interest rates hurt because they increase monthly costs, but it’s the lack of supply that contributes to elevated list prices. Secondly, housing tends to punch above its weight. It may only represent 12% of U.S. GDP, but it has a significant ripple effect on the rest of the economy. Buying a home usually requires a mortgage, which benefits the banking industry. A new home requires construction, meaning raw materials and ground moving machinery from companies like Caterpillar (CAT). Not to mention all the goods and services a newly created household needs – appliances, furniture, services like TV and internet and so on. We’d like to see starts that are an in line with expectations, if not better, because a loosening of supply could help reduce prices and improve affordability. If we can get inflation down while seeing other economic indicators hold up, the likelihood of a soft landing increases. Finally, we will get the February report on industrial production and capacity utilization, which provides insight into the manufacturing, mining, and electric and gas utilities industries. Combined these industries represent nearly 14% of GDP. We want to see activity here hold up to show the overall resiliency of the economy. Taken together, these reports will give us significant insight into how the broader economy is holding up in the first quarter of 2023. With fourth-quarter earnings season largely in the rearview mirror and the first quarter 2023 season not kicking off until the middle of April, investors are going to lean heavily on these releases in an attempt gauge both the path of inflation and the Fed’s actions to fight it. They will also be used to try to determine the odds of a recession this year. The SVB effect This is an incredibly dynamic market and things can change on a dime. On Thursday, we told members that as a result of Fed Chair Jerome Powell’s testimony this week, the market flipped from pricing in a 70% probability of another quarter-point rate hike at this month’s meeting to pricing in a 75% likelihood of a half-point raise. As of Friday’s close, the odds swung back in favor of a quarter-point hike (60.5% likelihood). While the nonfarm payrolls report on Friday has something to do with the change, the rapid meltdown of Silicon Valley Bank — the second-biggest bank collapse in U.S. history — is also to blame. Regulators took control of SVB on Friday , after shares fell Thursday and the bank couldn’t find another company to buy it. Startup business clients, many of which are private and therefore lack access to the public markets, had been burning through cash and drawing down on deposits at the bank. As a result of the brutal market we’ve been in, the IPO market has essentially come to a halt. In order to fulfill deposit requests from clients, the bank needed to raise money by selling loans, which have taken a huge hit as a result of higher rates. According to a stakeholder letter published earlier this week, the bank realized a $1.8 after-tax loss associated with the sales – while at the same time announcing a $2.25 billion capital raise. Ultimately, the raise doesn’t seem to matter much as we learned on Friday that the California Department of Financial Protection and Innovation has closed down Silicon Valley Bank. At the same time, the rapid rise in interest rates has resulted in the loans on the bank’s book of business to decline in value. Similar to dividend yields, when rates rise, the face value of the security declines. To be sure, the issues plaguing SVB are in many ways idiosyncratic. But it has put investors on edge because it does represent the breaking of a financial instruction and therefore a potential crack in the system overall. To be clear, this does not appear to represent a major risk for the financial system overall (as was the case in 2008) but it’s never a good sign when a relatively well-respected institution – and one so important to the startup world – falls so rapidly and is forced to take drastic measures just to pay out deposits. Why does all this matter? What happened at SVB, is happening elsewhere as the increase in rates is going to take down the value of loans on any bank’s book. When rates rise, the market value of existing debt declines. The magnitude of the decline depends on how much time to maturity, with the longer the time to maturity the greater the decline (this is what people are referring to when they discuss “duration risk”). SVB, however, was unique in that it did a lot of business with venture capital-backed companies and had unique lending practices. For example, the bank would lend against the equity of non-public companies in anticipation of an IPO in the future. The SVB blow-up is also something the Fed is likely factoring into its thinking. Its mandate is to get inflation under control, but it could decide to proceed with caution and hike just 25 basis points at the next meeting, if at all. Given the lag effect of rate hikes, there is an argument that it makes more sense to simply pause for a moment and see things shake out over the next month. No portfolio companies will be reporting next week. Here are some other earnings reports and economic numbers to watch in the week ahead: Monday, March 13 Before the bell: Lufax Holdings (LU), ZIM Integrated Shipping (ZIM) After the bell: BuzzFeed (BZFD), Getty Images (GETY), GitLab (GTLB), Turtle Beach (HEAR) Tuesday, March 14 Before the bell: Caleres (CAL), Hagerty (HGTY), IHS (IHS), J.Jill (JILL), Super Group (SGHC) After the bell: Lennar Corp (LEN), StoneCo (STNE), Guess? (GES), Beachbody (BODY) 8:30 a.m. ET: Consumer Price Index Wednesday, March 15 Before the bell: Dorados (ARCO), Audacy (AUD), Black Rifle Coffee (BRCC), Calumet Specialty (CLMT), Oatly (OTLY), Sportradar (SRAD) After the bell: Adobe (ADBE), Five Below (FIVE), ZTO Express (ZTO), Tutor Perini (TPC), PagerDuty (PD), Owlet (OWLT), Cadre Holdings (CDRE), Array Technologies (ARRY) 8:30 a.m. ET: Producer Price Index 8:30 a.m. ET: Retail Sales Thursday, March 16 Before the bell: Academy Sports (ASO), Dollar General (DG), Jabil (JBL), KE Holdings (BEKE), Signet Jewelers (SIG), Blue Apron (APRN), Designer Brands (DBI), G-III Apparel (GIII) After the bell: FedEx (FDX), Arena Group (AREN), GoHealth (GOCO), LivePerson (LPSN), Traegar (COOK) 8:30 a.m. ET: Initial Claims 8:30 a.m. ET: Housing Starts & Building Permits Friday, March 17 Before the bell: Algonquin Power & Utilities (AQN), Ballard Power (BLDP), Xpeng (XPEV) 9:15 a.m. ET: Industrial Production & Capacity Utilization Looking back It was a tough week for stocks, with the Dow falling 4.4% in its worst showing since June. The S & P 500 lost 4.5% and the Nasdaq dropped 4.7%. The most consequential of the week’s economic data was Friday’s jobs report. The headline payrolls number rose by 311,000 in February, well above the 225,000 Dow Jones estimate. Investors took some comfort, however, in the average hourly earnings coming in softer than expected — up 4.6% from a year ago, below the estimate of 4.8%. This was a promising sign that the Fed’s war with inflation is working. The market also tried to weigh Fed Chair Jerome Powell’s midweek testimony on Capital Hill. Many topics were covered, but most important to investors was sussing out whether the central bank’s rate hikes are helping to guide us to a so-called soft landing for the economy, or if they’re too aggressive and can send the U.S. economy into a deep recession. There is no clear answer, unfortunately. The impact of monetary policy is lagging, making it impossible to be certain of the right course of action. An even bigger issue is that the Fed is regrettably stuck with relatively blunt tools — raise rates, and reduce the size of it balance sheet by letting bond holdings mature without replacement (quantitative tightening) — to address an issue that requires a high level of precision. The Fed can’t really do anything to reduce supply chain bottlenecks or increase the labor supply. And if you can’t increase supply, the only way to get inflation back down to the 2% target level is to destroy demand. That sounds simple enough. One major hurdle, however: The consumer is flush with savings, which means she can absorb the rise in prices without suffering the demand destruction. The other problem is that while the consumer may be flush in the aggregate, those funds — as is usually the case — are not evenly distributed. One good example is the most recent earnings call for Lowe’s Companies (LOW). The home improvement retailer isn’t in the Trust portfolio, but we find value in listening to management teams that provide a real time view, especially those teams that run “bellwether” companies. CEO Marvin Ellison said that consumer savings are still roughly $1.5 trillion higher than before the pandemic, with 85% concentrated in the top 40% of income earners. In other words, the consumer as a whole may be flush, but the bottom 60% is going to feel demand destruction a lot harder than the upper 40%. That’s a real problem. In its quarterly earnings call, Chipotle (CMG) management also discussed the “two classes of consumer” when asked about customers’ ability to handle higher prices. The company hasn’t seen any meaningful resistance, but said the higher income-consumer, the individual that earns over $100,000, coming more often to the fast-food restaurant. Brinker International (EAT), which owns and operates Chili’s Grill & Bar, told investors it saw the lower-end customer “tail off” even before incremental price increases. At the same time, customers that continue to come of its restaurants are willing to spend considerably more, the team said on its conference call. Given all these comments, we can start to see why the rate hikes are such a point of contention. The Fed simply doesn’t have a way to only target demand at the top. However, its dual mandate is to maximize employment and bring down inflation. The good news is that unemployment remains low. The bad news is wage inflation — as high as it is at 4.6% — still isn’t keeping up with the price of goods; the core PCE price index recently rose 4.7% versus the year ago period, indicating a deterioration in the overall affordability of goods and services. Record low unemployment, however, means the Fed has room to see it go up slightly if it helps beat inflation. This outcome would fulfill the bank’s dual mandate. Powell has made clear that his goal is not to put people out of work. But he is somewhat cornered by the need to bring down inflation. Does the Fed stop raising rates and risk inflation reigniting to the detriment of everyone? Or does he rates higher for longer until the job is done and risk millions of layoffs? Is that the lesser of the two evils? Given his mandate and comments this week, the answer is yes. The Fed will continue to parse the data do whatever is necessary to stomp out inflation, even if it means an uptick in unemployment. In other economic news this week, on Wednesday, the ADP Employment report pointed to a 242,000 private payroll increase in February, well above the 205,000 expected on the Street. On Monday, we learned that factory orders fell 1.6% monthly in January, below the expected 1.8% decline. Under the hood, all sectors finished lower for the week, led down by financials and followed by materials and real estate. Meanwhile, the U.S. dollar index is hovering just above the 104. Gold is trading in the upper-$1,800s per ounce. West Texas Intermediate crude prices are hovering around the mid-$70s per barrel, while the yield on the 10-year Treasury eased back to about 3.7%. No portfolio companies reported earnings this week. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust is long.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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U.S. Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing, and Urban Affairs Committee on Capitol Hill on March 3, 2022.
Pool | Getty Images News | Getty Images
Wall Street doesn’t have much time to digest this week’s market-moving news — including Friday’s jobs report and the sudden collapse of Silicon Valley Bank — before it has more economic data on its plate.
