March 29, 2016

Stocks fell in early trading, but quickly pared losses (Dow -31 pts; SPX flat). Energy is the worst performing sector, down 1% as oil prices drift lower. WTI crude oil is off 3% to $38/barrel and Brent crude is trading down just below $39/barrel. Tech and telecom sectors are solidly in the green at the moment. The dollar is a bit weaker this morning, and actually has been in a downtrend since the end of January. That has allowed commodities some breathing room—but not today. Barclays says investors should remain wary of commodity investments because global demand isn’t improving much. Despite a recent turn higher, the Bloomberg Commodity Index is down around levels not seen since 1999. Bonds are trading higher this morning as yields tick lower. The 5-year Treasury yield is down to 1.33% after having traded up to 1.49% at mid-month. The 10-year Treasury yield is trading around 1.86%.

 The S&P Case-Shiller US Home Price Index rose 5.4% y/y in January, accelerating slightly from December’s 5.3% growth rate. So that means home prices are rising at roughly twice the rate of inflation. Part of the reason for that, of course, is low for-sale inventory. Another reason is that as a country, we’ve underbuilt new homes (i.e. not enough to meet population growth) over the past 7-8 years. Finally, meaningful job market improvement and steady wages have helped prop up housing demand.

 BlackRock (BLK) and Pacific Investment Management Co (PIMCO)—two of the country’s largest asset management companies—are telling investors that inflation is poised to increase. BlackRock’s chief global investment strategist says a tightening US labor market combined with stabilizing oil prices will result in higher inflation. And Bloomberg reports an economist at PIMCO said he thinks the bond market is mispriced—that is, bond yields are too low given the likelihood of higher inflation expectations. He thinks the 10-year Treasury yield will get back to 2% over the next 12 months. Higher inflation, of course, presupposes a stable or improving economy, and will cause bonds to underperform stocks.

The Consumer Confidence Index rose to 96.2 this month from an upwardly revised 94.0 in February. Economists were expecting no change, so this is good news. Any improvement in consumer attitudes about the economy is welcome. Six months ago, the index was around 100 but a stock market correction and softer economic growth dragged it lower. The hope is that higher confidence levels will lead to improved consumer spending in the back half of the year.


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