April 10, 2018

Stocks gapped up at the open as trade tensions eased (see below). The Dow is currently up 525 pts and the SPX is up 1.8%. Materials, energy and tech sectors are all up over 2% in early trading. The VIX Index is back down to 20.7. European markets are up about .7% and Asia was up at least that much overnight. Oil, gas and metals are trading higher as well. WTI crude oil is back up to $65.20/barrel. Copper and iron ore are up well over 1%. Bonds are not surprisingly down in price. The 5-year and 10-year Treasury note yields ticked up to 2.63% and 2.80%, respectively. 

As widely anticipated, Chinese President Xi Jinping de-escalated the war of words with President Trump in a speech today. He attributed Mr. Trump’s tactics to a “Cold War mentality and zero-sum game thinking [that] are outdated.” More importantly, he said he supports free trade and pledged a “new phase of opening up trade.” He mentioned increasing imports, lowering barriers to foreign ownership of businesses in China, and expending protections for intellectual property. That pretty much covers Mr. Trump’s list of demands. 

Yesterday, investors had the rug yanked out from under their feet when the FBI raided the office of President Trump’s personal attorney, Michael Cohen. They collected documents relating to several issues, including the president’s alleged relationship with Stormy Daniels. Special Counsel Robert Mueller, who is investigating the president’s dealings with Russia, appears to have precipitated the raid. Headlines immediately smacked down the stock market’s rally. The Dow’s nearly 400 point rally fell to just 46 points by the close. But that was yesterday, before Mr. Xi’s speech.

The Congressional Budget Office (CBO) raised its 2018 economic growth forecast to 3.3% from 2%. One key reason for the revision was tax reform. Lower corporate taxes will likely boost GDP by .7% over the next 10 years, producing average annual growth of 2%. In addition, lower taxes could result in 1.1 million additional jobs. Of course, tax reform will also result in higher federal budget deficits. The CBO predicts that by 2028, total federal debt will roughly equal the annual output (that is, gross domestic product) of the US economy. 

The Producer Price Index (PPI) accelerated to 3.0% y/y growth in March. That’s higher than February’s figure and also higher than economists were forecasting. No matter how you parse the data, wholesale inflation is rising. Food prices were up over 2% for the month; healthcare and other services costs increased as well. For a market so hyper-sensitive to inflation, it is a small wonder that investors and the media are clearly shrugging off this report. Barron’s calls the acceleration “modest.” Of course, the big question is whether hotter wholesale inflation translates into hotter retail prices? We’ll find out tomorrow with the release of the Consumer Price Index (CPI). 

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