March 14, 2017

Stocks opened lower again this morning (Dow -65 pts; SPX -.5%). Industrials (-.9%) and energy (-1.8%) sectors are down the most in early trading. Only the utilities sector is managing a slight gain. The VIX Index rose sharply to 12.5, but still suggests a very low level of investor fear. European markets are poised to close down about .5% today. The dollar is up modestly and most commodities are lower. WTI crude oil is down 2% to trade around $47.40/barrel. Bloomberg reports some evidence that OPEC countries are not, after all, strictly adhering to oil production quotas. Bonds are slightly higher in price as yields edge lower. The 5-year Treasury yield isn’t moving much; hovering around 2.12%. The 10-year yield ticked down to 2.60%. Yesterday, the 10-year closed at its highest yield since September 2014. 

Investors are getting a little case of the Fed jitters. A recent CNBC survey suggests we should “look out for a more aggressive Fed this year.” The consensus is that the Fed will raise interest rates three times this year. But a growing number (25%) of respondents say they expect four rate hikes this year. And here’s another interesting point: 86% of respondents say the Fed will actually begin to reduce its balance sheet (i.e. sell some of the bonds it has accumulated over the last seven years) by June 2018. That step, of course, is the ultimate step to unwind all the post-Great Recession monetary stimulus.  

Barron’s ran an article over the weekend about China’s improving economy. I’ll summarize the highlights. Electricity production is up 8.% from year-ago levels. Rail freight traffic is up 10.4% y/y. Domestic credit growth (i.e. bank lending) is up 9.7% y/y. These growth rates are improving and seem fairly healthy. Barron’s asserts that China—just like developed economies—has regular business cycles. And the economic weakness we’ve seen in recent years is no worse than typical during a down-cycle. So, the article posits, we can expect China’s GDP to reaccelerate over 10% within the next several years as the cycle turns. This is a very out-of-consensus view of China. Most economists see China in a long-term transition from manufacturing/export driven growth to more of a consumer-driven economy. And that means gradually slowing growth. 

The Producer Price Index (PPI) accelerated to 2.2% year-over-year growth in February. This is a closely-watched gauge of wholesale price inflation, and 2.2% is the highest in five years.  A good portion of the price acceleration we’ve seen in the past year has been due to the recovery in energy prices. If you strip out food & energy, PPI is up 1.5% y/y, and that is also accelerating. While this report won’t set off any alarm bells, it does suggest that inflation throughout the economy is rising. 

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