The S&P 500 ends a difficult February with a 2.6% decline in inflation data. February began on sure footing after the Fed hiked interest rates by 25 basis points as widely expected. However, data in the form of an explosive jobs report on the first Friday of the month set the stage for further disappointing economic reports to follow. The middle of February saw the release of the widely anticipated consumer price index and producer price index which both came in hotter-than-anticipated and exacerbated fears that a lot more work would need to be done by the Fed in terms of raising interest rates to combat inflationary pressures. Furthermore, a surge in retail sales in January suggested that consumer spending has remained strong, which in turn could keep prices elevated. After a very strong start to the year for financial markets, February saw that go into reverse, with losses across equities, credit, sovereign bonds, and commodities.
Regarding interest rates and possible Fed actions, there are now two camps emerging. There are those who believe the Fed should raise rates to 5% and leave them there for an extended period, perhaps even years. On the other side, there are those who now believe inflation is more intransigent than first believed, and will require a sharp increase in rates at or above 6% ASAP if we’re going to tackle inflation. It appears the former group seems to be holding sway for the time being, with the consensus believing the Fed will take the slower approach with perhaps a longer runway for bringing down inflation. It remains a difficult balancing act trying to bring down inflation while avoiding a recession or causing significant stock market disruptions. Simultaneously the Fed is trying to maintain its other mandate, full employment, while simultaneously trying to curb wage growth in the face of a tight labor market. We should expect another interest rate hike at the next FOMC meeting in a couple weeks. The size of the hike is up in the air for now.
In company news, Eli Lilly made a blockbuster announcement it will be reducing the price of insulin it markets by as much as 70%. The reductions impact insulin Lispro, Humalog, and Humulin. The company is also launching Rezvoglar, a basal insulin that is biosimilar to Sanofi’s Lantus injection, for $92 per five-pack, a 78% discount to Lantus, beginning April 1. Additionally, the company is introducing a program that will cap out-of-pocket expenses at $35 per month. The cap applies to individuals with commercial insurance at retail pharmacies. Those without insurance can also apply for the $35 cap through the Lilly Insulin Value Program.
In other news, the U.S. Environmental Protection Agency (EPA) said Wednesday it will propose a rule allowing sales of gasoline with a higher ethanol blend in Midwest states, starting with the summer 2024 driving season. The plan would allow for the sale of E15 gasoline year-round in the Midwest. Proponents believe higher E15 supply will ease pump prices and help farmers. Those against cite studies that show adding ethanol to gas results in fewer miles per gallon (as much as 10% depending on the study) and more wear on internal combustion engines, particularly rubber gaskets. While seemingly better for the environment, it will drive costs up for consumers who get worse mileage and have the unintended consequence of driving up the price of food as feedstock is redirected to the production of fuel. As is often the case with new legislation these days, there will be winners and losers. The consequences will eventually be known.
In closing, I turn to a technological innovation that may be on the horizon. It was reported this week that Ford Motor Co. has applied for a patent on a technology designed to allow the company to repossess cars remotely if the owner fails to make payments. The proposed system would first alert the owner about a missed payment before disabling certain features like GPS, air conditioning, and radio. If owners fail to act, the car can then lock them out and eventually drive itself autonomously to an impound lot. And if repossession costs more than the value of the vehicle, it could drive itself to a junkyard! The patent was filed in August 2021 but was formally published last week. Loan delinquencies have been steadily ticking higher with severely delinquent auto loans in January hitting their highest point since 2006. Now you know.Bruce J. Mason, MBA