July 13, 2017

Stocks opened slightly higher today. The Dow is current up 18 pts and the SPX is up .1%. Retailers, banks, and some tech stocks are trading modestly higher, whereas telecoms, biotechs and gold miners are lower. The VIX Index is still hovering around 10. Most commodities are lower, although WTI crude oil is up about 1% to trade around $46.10/barrel. That’s great news for the stock market. Bonds are selling off again today as yields resume their slow march higher. The 10-year Treasury yield ticked up to 2.35% and I’m guessing the 10-year will soon test near-term resistance at 2.42%. 

The Producer Price Index (“PPI final demand”) decelerated to 2.0% y/y growth in June, roughly in line with economists’ expectations. This is a closely-watched gauge of wholesale inflation throughout the US economy. Recall that in 2014-2015, PPI was at very low levels as the economy struggled. But since then inflation has gradually recovered. And at 2.0% growth, it is near the high end of the range we’ve seen over the last 5 years. That said, the absolute level of inflation is still very low. That’s good because the Federal Reserve isn’t forced to tighten monetary policy quickly. It’s also bad because very low inflation tends to go hand-in-hand with sluggish economic growth.

Federal Reserve Chair Janet Yellen testified before the Senate Banking Committee today. She was asked about the fact that inflation data have been weaker in the last few months, and whether that would cause the Fed to pause its monetary policy tightening. She said, “It is premature to conclude the underlying inflation trend is falling well short of 2%” and indicated that the Fed would continue on a “gradual path of rate increases.”  

Jobless claims—that is, initial filings for unemployment insurance—continue to pace at historically low levels. Whereas back in the Great Recession weekly claims were routinely above 600,000, they’ve fallen to around 250,000. The insured unemployment rate is sitting at just 1.4%, an all-time low. Bloomberg notes, “Labor market conditions are tight, with continued strengthening underscored by the latest dip in unemployment benefit claims, which linger at some of the lowest levels in over 40 years.” 

Second quarter earnings season will get going in earnest tomorrow with the banks (JP Morgan, Wells Fargo, Citigroup). 

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