September 22, 2017

Stocks opened slightly lower again today (Dow -29 pts; SPX flat).  Utilities, real estate and healthcare are leading to the downside. Telecoms, industrials and energy are in the green, however, continuing a recent trend. The VIX Index still isn’t registering much fear, trading just under 10. European markets are poised to close slightly higher today. And by the way, just about all the major European stock indexes are up more this year than the SPX or Dow. The dollar is weaker again vs. a basket of foreign currencies, and is down about 10% so far this year. That doesn’t really fit well with the Fed’s expectations for rising interest rates over the next year. In other words, if the economy is improving and interest rates are rising, you would expect a stronger dollar. Part of the reason for the weaker dollar is that foreign economies are faring better this year. Bonds are trading a bit higher today after a two-week drubbing. The 5- and 10-year Treasury yields edged back down to 1.87% and 2.26%, respectively. But it really does look like the 10-year yield will move up to test resistance at 2.39% soon. 

Markit Economics’ private gauge of US business activity faded a bit this month. The research firm’s index of manufacturing activity improved slightly to 53.0 from 52.8 in August. But the more important service sector activity index fell back to 54.6 from 55.3 in the prior month. As with any other “PMI” index, any reading above 50.0 suggests businesses are expanding. So this isn’t terrible news, but indicates some economic momentum has faded. On Monday, traders will look to the latest Chicago Fed National Activity Index for corroboration. 

At the risk of boring everyone to death, I need to address inflation in the context of Wednesday’s Fed announcement. The Federal Reserve Bank of New York just released a new measure of US price inflation, called Underlying Inflation Gauge (UIG). You may know that the Fed’s current preferred gauge, core CPI, suggests inflation is only rising at a 1.4% y/y rate. And of course, the Fed’s target is 2.0%. The new UIG index not only measures prices, but also the unemployment rate, stock prices, bond yields, and purchasing managers’ indexes (PMIs) like the one described above. The New York Fed claims UIG “has shown more accurate forecasts of inflation compared with core inflation measures.” In other words, they believe UIG is able to predict inflation trends in the near-term future. The August reading for UIG is 2.7%, the highest since November 2007. In other words, underlying inflation is finally accelerating. Is this what Fed officials were thinking about when they predicted four more interest rates hikes by the end of 2018? 

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