Stocks are flat in early trading (Dow -7 pts; SPX -.14%). Real estate is leading the way, up 1%. Tech, telecom, materials and utilities are modestly higher. The rest of the landscape is down a bit. By the way, the Trump Rally (which began the day after the election) has now eclipsed 10% for the SPX. The dollar is a bit weaker today and commodities are mixed. WTI crude oil is trading flat at about $53.20/barrel. Bonds are slightly higher on the day. The 5-year Treasury yield is hovering around 1.96% and the 10-year Treasury is trading at 2.47%. On average, economic data are improving and that has pushed rates up over the last week.
Yesterday, we learned that retail price inflation is accelerating faster than expected. The Consumer Price Index (CPI) increased 2.5% in January compared with year-ago levels. That’s the highest level on the CPI in almost four years. Yes, gasoline prices jumped nearly 8% in one month. But even excluding the more volatile food & energy categories, CPI is still running up around 2.3% y/y. So prices across the economy are generally rising at a slightly quicker rate. Remember, the Federal Reserve’s inflation target is 2.0%. So this report will put some pressure on interest rates—both short-term rates to fight inflation, and long-term rates because inflation expectations are rising. But that’s not a necessarily a negative. Our view has been that rates will rise in 2017 as a byproduct of stronger economic growth. Growth is the key.
Retail sales absolutely exploded in January, according to a survey by the US Bureau of the Census. In fact, I’d say this report is the missing link in assessing the strength of the economy. Retail sales gains have been pretty modest lately despite the fact that consumer confidence surveys were rising sharply. But January sales shot up 5.6% over year-ago levels. That’s the highest y/y growth rate in almost four years. And December retail sales were revised higher to 4.4%. So in one report, our understanding of the economy’s momentum has changed for the better. This is a big deal.
Industrial production disappointed economists, falling .3% in January from prior month levels. On a year-over-year basis, production decelerated to 0% growth. The problem was a weather-related dip in utility output. But another key component, manufacturing production, was pretty flat due to short-term drop in autos. But while the report was underwhelming, let’s remember that manufacturing and mining are in the early stages of recovering from the 2015-16 cataclysm of slower global economic growth, the stronger dollar and plunging oil prices.
Housing starts (ground-breaking on new developments) fell a bit in January, but that’s only because December starts were revised sharply higher. So forget the headlines; here’s the way to look at it: we’re building new homes at a rate of about 1.25 million units per year, and that’s around the highest level since late 2007. But we need to build more, maybe 1.4 – 1.5 million just to keep pace with population growth. So the bottom line is that the housing market is healthy and I expect that to continue.