Raphael Stevens

James Bullard, president of Federal Reserve Bank of St. Louis, at the Jackson Hole economic symposium, in Moran, Wyoming, U.S., on Thursday, Aug. 22, 2019.
David Paul Morris | Bloomberg | Getty Images

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U.S. stocks are cowed by a persistently hot economy — and hawkish rhetoric from the Fed.

What you need to know today

The U.S. producer price index, which measures inflation at the wholesale level, rose 0.7% in January. It was the biggest increase since June, and 0.3 percentage points higher than economists had expected.

Tesla is recalling 362,758 vehicles equipped with its experimental driver-assistant software. The company warned that the software, known as Full Self-Driving Beta, may cause vehicles to crash.

PRO Crypto is making a comeback in 2023, according to Bernstein analyst Gautam Chhugani. Investors may be viewing recent regulatory actions in the U.S. as less severe than they had expected.

The bottom line

Looking at the January figures, the U.S. economy is firing on all cylinders. A quick recap: The lowest unemployment rate in 53 years. A rebound in consumer spending despite higher prices. And overnight, we found out that the producer price index rose the most in eight months. This almost bizarrely strong economy implies that inflation — while still falling — remains uncomfortably high and sticky.

For a while, it seemed as if markets could live with that — and even embrace it as a new normal, in which economic growth can exist comfortably with inflation higher than 2%. With each hotter-than-expected inflation report, markets rose.
Until yesterday. Markets finally caved in. The Dow Jones Industrial Average fell 1.26%, the S&P 500 lost 1.38% and the Nasdaq Composite dropped 1.78%. “It shouldn’t be a surprise to see the market take a breather as hopes of a dovish Fed in the coming months fade,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley.
Indeed, it’s not just that Federal Reserve doves might be fluttering away. It’s that the hawks are swooping in. Markets had widely anticipated, and priced in, 25 basis-point interest rate hikes for the Fed’s next two meetings. Yesterday, that forecast was badly shaken.
St. Louis Federal President James Bullard said Thursday that he “was an advocate for a 50-basis-point hike and … argued that we should get to the level of rates the committee viewed as sufficiently restrictive as soon as we could.” Cleveland Fed President Loretta Mester echoed Bullard’s hawkishness, saying she wants higher rate increases. Neither Mester nor Bullard vote this year on the Federal Open Market Committee, but their sentiments could signal a Fed increasingly determined to strangle inflation.

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Correction: This report has been updated to accurately state the U.S. trading day it discusses. An earlier version used the wrong day of the week. More

Sen. John Fetterman of Pennsylvania checked himself into a hospital to “receive treatment for clinical depression,” his chief of staff said.
Fetterman had suffered a debilitating stroke on the campaign trail before winning his first term in office.
Fetterman had been hospitalized last week after feeling lightheaded. His doctors determined that he had not suffered another stroke, his office said at the time.

Sen. John Fetterman (D-PA) departs a closed-door, classified briefing for Senators at the U.S. Capitol on Tuesday, Feb. 14, 2023 in Washington, DC.
Kent Nishimura | Los Angeles Times | Getty Images

Sen. John Fetterman, D-Pa., checked himself into a hospital to “receive treatment for clinical depression,” his chief of staff said Thursday.
Fetterman, the 53-year-old freshman senator who last year suffered a debilitating stroke on the campaign trail, was admitted to Walter Reed National Military Medical Center in Bethesda, Maryland, on Wednesday night, chief of staff Adam Jentleson said in a statement.

“While John has experienced depression off and on throughout his life, it only became severe in recent weeks,” the statement said.
“On Monday, John was evaluated by Dr. Brian P. Monahan, the attending physician of the United States Congress,” the chief of staff said. “Yesterday, Dr. Monahan recommended inpatient care at Walter Reed. John agreed, and he is receiving treatment on a voluntary basis.”
“After examining John, the doctors at Walter Reed told us that John is getting the care he needs, and will soon be back to himself,” Jentleson said.
Fetterman had been hospitalized last week after feeling lightheaded. His doctors determined that he had not suffered another stroke, his office said at the time.
“After what he’s been through in the past year, there’s probably no one who wanted to talk about his own health less than John,” his wife, Gisele Fetterman, said in a pair of tweets Thursday afternoon. “I’m so proud of him for asking for help and getting the care he needs.”

She asked for privacy during the “difficult time for our family,” adding: “Take care of yourselves. Hold your loved ones close, you are not alone.”
Fetterman missed votes on Capitol Hill on Wednesday night and Thursday, NBC News reported.
Fetterman said in June that he had “almost died” after suffering a stroke in May, shortly before winning his party’s nomination to run for the Senate seat in Pennsylvania that was held by now-retired Republican Sen. Pat Toomey.
The stroke took Fetterman, then the state’s lieutenant governor, off the campaign trail for months. When he made his public return, Fetterman said he was suffering from lingering auditory processing and speech issues.
He struggled significantly to deliver clear thoughts during his one and only debate with his Republican opponent, Dr. Mehmet Oz, in October.
But Fetterman maintained a polling advantage over Oz, a celebrity doctor and TV host backed by former President Donald Trump, even while he was absent from public view.
His victory over Oz in the midterms flipped a red seat blue and helped Democrats extend their slim majority in the Senate.
Sen. Bob Casey of Pennsylvania said he was proud of his fellow Democrat “for getting the help he needs and for publicly acknowledging his challenges to break down the stigma for others.”
It’s common for stroke survivors to experience depression, and the cause may be biochemical or psychological, according to the American Stroke Association.
Fetterman had been frustrated with his post-stroke health challenges throughout the campaign, his staff has told NBC. His difficulties with communication have also had an impact on his relationship with his family, as has his time away from them due to his Senate duties, NBC reported.
“Millions of Americans, like John, struggle with depression each day. I am looking forward to seeing him return to the Senate soon,” Senate Majority Leader Chuck Schumer, D-N.Y., said in a tweet.

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The three unmanned aerial objects that were shot down over the weekend by the U.S. military were “most likely tied to private companies, recreation or research institutions,” President Joe Biden said.
“Nothing right now suggests that they were related to China’s spy balloon program,” he added.
The remarks came after days of mounting pressure on the White House, from both Democrats and Republicans in Congress, to share more of what was known with the public.

WASHINGTON — U.S. President Joe Biden said Thursday that three unmanned aerial objects shot down over the weekend by the U.S. military were “most likely tied to private companies, recreation or research institutions,” and were not connected to the massive Chinese surveillance balloon that was shot down on Feb. 4.
“We don’t yet know what these three objects were, but nothing right now suggests that they were related to China’s spy balloon program or that they were surveillance vehicles from any other country,” Biden said at the White House.

The remarks came after days of mounting pressure from both Democrats and Republicans in Congress, who said the American people deserved to hear from the president exactly what the administration knew about the spy balloon and why Biden later ordered three more floating objects shot down by American fighter jets.
The president explained that in the wake of the Chinese balloon, American military defense radars raised their sensitivity levels “to pick up more slow-moving objects above our country and around the world.”
“In doing so, they tracked three unidentified objects, in Alaska, Canada and over Lake Huron in the Midwest,” he said.
“I gave the order to take down these three objects due to hazards to civilian commercial air traffic, and because we could not rule out the surveillance risk over sensitive facilities,” said Biden.

Sailors assigned to Assault Craft Unit 4 prepare material recovered in the Atlantic Ocean from a high-altitude balloon brought down over U.S. territorial waters on February 4 for transport to federal agents at Joint Expeditionary Base-Little Creek in Virginia Beach, Virginia, February 10, 2023.
Ryan Seelbach | US Navy Photo | via Reuters

As of Thursday, the White House said it had recovered key surveillance technology from the Chinese balloon. “What we learn will strengthen our capabilities,” he added.

It was not clear whether any debris from the three smaller objects had been recovered, or for how long those efforts would continue.
Following the destruction of the spy balloon, the United States announced new sanctions last week on six Chinese military and aerial technology firms for their alleged involvement in China’s global aerial surveillance program.
On Thursday, Beijing announced its intent to levy sanctions against major U.S. defense contractors in an apparent retaliation for the American sanctions.
But rather than raise the stakes even higher with his remarks, Biden sought to defuse tensions between the world’s two largest economies, tensions that some experts say are near an all-time high.
“We seek competition, not conflict with China,” said the president. “We’re not looking for a new Cold War … we will compete and will we responsibly manage that competition so that it doesn’t veer into conflict.”
The spy balloon episode, he said, “underscores the importance of maintaining open lines of communication between our diplomats and military professionals” in Beijing and Washington.
Biden also said he expected to speak with Chinese President Xi Jinping and “get to the bottom” of what happened.

Two white balloons float near the Chinese flag as activist Rev. Patrick Mahoney protests against the Chinese government over the alleged Chinese surveillance balloon that was shot down over the US last week, during a demonstration outside the Chinese Embassy in Washington, DC, February 15, 2023.
Saul Loeb | Afp | Getty Images

Speaking later to NBC’s Peter Alexander, Biden said the balloon incident was an example of the hundreds of individual events “of consequence” that occur between two major world powers like the U.S. and China, which are significant on their own, but “don’t necessarily reflect any fundamental change in policy.”
“I think the last thing that Xi wants is to fundamentally rip the relationship with the United States that was made, in terms of access” to U.S. markets, Biden told Alexander.
The massive Chinese surveillance balloon was first detected in American airspace off of Alaska on Jan. 28, and was shot down on Feb. 4 in U.S. airspace off the coast of South Carolina.
Floating visibly above the continental U.S. and Canada for eight days, the spy balloon caused an outcry, with both the public and members of Congress demanding to know why Biden had not ordered the balloon be shot down sooner.
Less than a week after the spy balloon was destroyed, the first of three more objects was taken down in waters above the Arctic Ocean on Friday. The size of a small car and floating at 40,000 feet, this object was much smaller than the Chinese balloon.
One day later, a balloon that was similar in size and altitude was shot down over the Canadian Yukon. The third floating object was slightly smaller and floating at just 20,000 feet when it was taken out over Lake Huron on Sunday.

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Hasbro is maintaining a conservative outlook, mirroring the modest approach it had in 2022.
Hasbro reported disappointing holiday sales, which it had anticipated given slowing consumer demand.
The toy maker behind Dungeons & Dragons and Transformers thinks things will pick up in the second half of 2023.

A Hasbro Monopoly board game arranged in Dobbs Ferry, New York, Feb. 6, 2022.
Tiffany Hagler-Geard | Bloomberg | Getty Images

Hasbro’s 2023 outlook might feel like déjà vu. At first, anyway.
The toymaker on Thursday announced its fourth-quarter results while issuing conservative guidance for the year, mimicking the modest expectations it had when it entered 2022.

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Hasbro is maintaining some optimism though, pointing to key bright spots from releases like Transformers and its growing Wizards of the Coast gaming division, which houses Dungeons & Dragons, along with the turnaround plan it announced in October.
Shares were flat by market close on Thursday.
Hasbro projected that full-year revenue will decline in 2023, but forecasted that the majority of the squeeze will be felt in the first half of the year. Hasbro said it expects revenue for the year to decline in the low-single digits, percentage-wise, which missed Wall Street’s expectations. Analysts surveyed by Refinitiv were projecting a 2.2% revenue increase.
The toy industry as a whole has felt a slowdown. Mattel had more optimism than Hasbro going into 2022 and had hoped that the holiday season would boost its dipping sales. But despite its confidence, the company underperformed in consumer product sales for its fourth quarter.
CEO Chris Cocks said on a call with analysts that he expects the slowing consumer demand that weighed on this year’s sales will continue into the first three quarters of 2023, but he hopes it will lighten up in the last quarter.

Cocks also said on the call that Hasbro would be looking to introduce a product line priced between $20 to $30, a cheaper option to help target the inflation-weary consumer.
In the toy industry, “anything below $30 is performing quite well. Anything above that is performing quite poorly,” UBS Executive Director Arpiné Kocharyan told CNBC.
Hasbro is maintaining hope that new releases like expansion packs for Dungeons & Dragons and Magic: The Gathering games will pay off and compensate for product sales declines. “There’s a lot of entertainment coming in Q2 that will have a nice halo effect in Q3 and Q4,” said Cocks. The company announced on Thursday that Magic: The Gathering is on track to be its first billion-dollar brand.
In general, for Wizards of the Coast, Cocks said, “You should expect an up Q1, a down Q2, a significant up Q3, and a fair up Q4,” which is based on the timing of the game’s new releases.
“By and large, this company outlook is going to be determined by how strong Wizard is,” Kocharyan told CNBC, noting that the gaming segment was a boon for dips in product sales.
“For this company, in terms of what makes or breaks it, a strong 2023 is going to be determined by how they fix some of the core brand portfolio led by Nerf,” Kocharyan added. Nerf lost some market share in the fourth quarter due to lower-priced competition.
The company, which houses brands like Peppa Pig and Play-Doh, has taken several hits in recent times, which led it to proceed with caution into 2022.
Hasbro started the year by losing the battle for Disney princess licensing rights to its rival Mattel in January. It also exited other brand licenses including Trolls. Then in February, the company adjusted to new leadership with Cocks taking over as CEO from interim chief Rich Stoddart after former CEO Brian Goldner died in 2021. Pandemic disruption to its film productions also meant delaying a key revenue stream that had helped buoy sagging product sales.
All of those factors, along with rising costs, slowing consumer demand, and exiting markets like Russia, amounted to about $300 million in revenue headwinds. Cocks said that he anticipates the majority of those headwinds to weigh on revenue for the first two quarters of 2023.
Kocharyan said she has some reservations as to how much the company can reliably predict an upswing in the second half of 2023.
The company reported a disappointing holiday quarter for 2022, which it had been anticipating due to outsized inventory without enough consumer demand to sell it off. It posted $1.68 billion in revenue, matching Wall Street’s expectations.
“As we announced previously, our fourth quarter and full-year 2022 results came in below our expectations,” said Cocks in the fourth-quarter earnings statement released Thursday. The toymaker cut 15% of its workforce in January in an effort to slim down costs amid sluggish performance in its consumer products division.
This is the first full quarter since Hasbro announced its three-year turnaround plan in October. The company had said it would focus its priorities on its direct to consumer segment, licensing and entertainment. The company has set a goalpost to secure a 20% operating profit margin by 2027.

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Smart Tax Planning

Daniel Werfel, President Joe Biden’s nominee to lead the IRS, answered questions before the Senate Finance Committee this week.
Werfel fielded questions from both sides of the aisle about the agency’s funding, enforcement, transparency and other priorities.  

Senate Finance Committee Chairman Ron Wyden, D-Ore., questions IRS Commissioner Charles Rettig at a Senate Finance Committee hearing.
Tom Williams | Pool | Reuters

President Joe Biden’s nominee to lead the IRS answered questions during a Senate Finance Committee hearing this week, highlighting key issues from lawmakers on both sides of the aisle.
Daniel Werfel, a former budget official and private sector leader, fielded questions Wednesday about the agency’s funding, enforcement, transparency and other priorities.  

“I think there’s quite clearly a respect for Danny Werfel and recognition that he’s going to go through,” said Mark Everson, a former IRS commissioner and current vice chairman at Alliantgroup.

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While there’s still time for questions, Everson expects a full Senate vote and confirmation to come “in a matter of weeks.”
Here are some of the key takeaways from the hearing.

Scrutiny of $80 billion in IRS funding will continue

The nomination comes at a critical time for the beleaguered agency, which is getting $80 billion in funding over the next decade in August as part of the Inflation Reduction Act.  
After months of scrutiny, House Republicans voted to rescind the funding in January, which was largely seen as a political messaging bill without the votes to pass in the Senate or support from the White House.

If I am fortunate enough to be confirmed, the audit and compliance priorities will be focused on enhancing IRS’ capabilities to ensure that America’s highest earners comply with tax laws.

Daniel Werfel
IRS Commissioner nominee

“Just because [Werfel’s hearing] was smooth doesn’t mean there won’t be a fairly charged environment with the House in Republican hands and the election coming,” Everson said.
The agency is expected to deliver the $80 billion funding plan on Friday per Treasury Secretary Janet Yellen’s request.

Audit rate won’t rise for those making under $400,000

Following a directive from Yellen, Werfel vowed not to increase audit rates for small businesses and households making under $400,000, relative to recent years.
“If I am fortunate enough to be confirmed, the audit and compliance priorities will be focused on enhancing IRS’ capabilities to ensure that America’s highest earners comply with tax laws,” Werfel said in his opening statement.

Tax enforcement fairness is a key issue

Senate Finance Committee Chair Ron Wyden, D-Ore., kicked off the hearing by emphasizing the Inflation Reduction Act’s goal of providing resources to achieve fairness in tax enforcement, aiming to “go after tax cheating from the big guys.” 
Wealthy Americans have increasingly seen fewer audits after years of budget cuts. During fiscal 2022, millionaires faced a 1.1% chance of an IRS audit, according to a recent report from Syracuse University’s Transactional Records Access Clearinghouse. 
Meanwhile, the audit rate has declined more slowly for lower earners claiming the earned income tax credit, and Black Americans are roughly three to five times more likely to face an IRS audit than other taxpayers, according to a recent study. 

If poor people are more likely to be audited than the wealthy, Werfel said it “potentially degrades public trust and needs to be addressed within the tax system.”
Angelique Neal, a tax attorney at Dickinson Wright, said Werfel “seems committed” to addressing these audit disparities to ensure fairness and equitable treatment for all taxpayers.
Building trust is “one of the foundations of government,” especially for an agency tasked with collecting the vast majority of revenue, said Neal, who previously served as a senior trial attorney in the office of chief counsel to the IRS. More