March 15, 2017

Stocks opened higher this morning (Dow +45 pts; SPX +.3%). The energy sector is rebounding (+1%) along with oil prices, as are transports and biotechs. But defensive sectors like utilities and real estate are also faring well. The VIX Index is sinking as stocks head higher; now hovering around 11.8. Traders often say 20 is the level that divides benign and fearful/volatile market conditions. The VIX hasn’t touched 20 for over a year. By the way, VIX April futures are trading around 13.7, which is still very tame. Commodities are mostly higher today (copper, gold, oil, ag products). WTI crude oil is back up to $48.50/barrel today. Bonds are up in price, down in yield. And since this is the day we’ll hear from the Federal Reserve regarding an expected interest rate hike, that should tell you the bond market has already priced it in. The 5- and 10-year Treasury yields are down slightly to 2.11% and 2.58%, respectively.

The Consumer Price Index (CPI) accelerated in February to 2.7% y/y growth. Economists expected a jump in retail inflation; this is the highest in nearly five years. Of course, we know that the recovery in energy prices has added to inflation. Year-over-year, gasoline prices are up something like 30%. Excluding food & energy, core CPI is holding pretty steady at 2.2% y/y growth. So this report is not alarming and shouldn’t cause the Federal Reserve to speed up interest rate hikes. But, as Barron’s notes, a “greater concern for the inflationary picture is the risk that wage gains, against full employment, will begin to kick in.”  

US retail sales so far in 2017 have been fairly strong. The Bureau of Census announced retail sales rose 5.7% y/y in February following an upwardly revised 6.0% y/y rate in January. This comes despite the fact that auto sales, which were very strong in 2016, have softened a bit. Those growth rates are the highest since 2012, and suggest consumer spending is accelerating. 

The Nat’l. Assn. of Homebuilders (NAHB) sentiment survey jumped to a 12-year high this month, suggesting home builders are very optimistic about the outlook for building activity. Homebuilders are more sanguine about current homebuyer traffic and also about sales expectations over the next six months. Remember, this jump in sentiment comes at a time when mortgage rates are rising. The reason is that President Trump signed an executive order aimed at rolling back a 2015 Obama Administration rule called “Waters of the United States.” Homebuilders say this rule greatly increased the cost of regulatory compliance. In fact, the NAHB estimates that 25% of the cost of a new home today is attributable to compliance.  

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