December 12, 2018

Stocks opened higher this morning (Dow +350 pts; SPX +1.57%). A number of sectors are up more than 1.5% in early trading: tech, communications services, energy, healthcare, industrials and consumer discretionary. Semiconductor stocks are rallying sharply for the second consecutive session. The SOX Index is trying to recover from a pretty deep 21% correction this year. The VIX Index is down around 20.6 and VIX January futures are trading down around 20, suggesting traders are less fearful than they were a week ago. The dollar is weaker on a benign inflation report (see below). That—along with OPEC’s decision to cut output—is helping oil prices recover. WTI crude is back up around $52.30/barrel. Bonds are mixed in early trading. For the second straight session, junk bonds are rallying; trying to recover from a 7% correction this year. Remember, junk bonds are seen as leading indicator of economic growth. In addition, we’re seeing Treasury bonds sell off for the third consecutive session. The 5-year and 10-year Treasury yields are back up around 2.76% and 2.90%. For what it’s worth, the bond market seems to suggest that the worst of the stock market correction is past.

The Consumer Price Index (CPI) suggests inflation eased a bit last month. CPI, a popular measure of retail inflation, decelerated to 2.2% year-over-year growth from 2.5% in October. Remember, last summer CPI was running up around 3%. Clearly, the driver of lower inflation has been a sharp drop in energy prices and that could be very temporary. If you strip out typically volatile categories like food & energy, underlying inflation is running at a 2.2% annual rate. That’s still a little lower than it was last summer, but not low enough to convince the Federal Reserve to stop hiking interest rates. Remember, the Fed’s target for underlying inflation is about 2%.

The CEO of UPS says he’s “cautiously optimistic” that the US and China can reach a deal on trade. He supports the Trump Administration’s goal of making trade more fair for both sides, but obviously is concerned about the impact of higher trade tariffs on global business activity (CNBC). Looking back, tax reform and deregulation have been great for business, but stimulus is fading and growth is decelerating a bit. Still, the US “economy is going well” despite increasing global concerns, such as Brexit and trade.

Bloomberg reports Apple Inc.’s (AAPL) suppliers located in China are considering moving out of the country if trade tariffs on electronics escalate to 25%. Of course, the tariffs they’re worried about would be imposed by the Trump Administration. Most iPhone components are made by Chinese supplier Hon Hai Precision Industry Co. in China. Apple and its suppliers don’t seem to be alarmed by a 10% tariff, but 25% would be another story.

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