June 12, 2018

Stocks opened modestly higher this morning (Dow flat; SPX +.2%). Most sectors are in the green, led by utilities, consumer discretionary and technology. Asian markets were up in the overnight session following the US/North Korean summit in Singapore (see below). The VIX Index is a bit lower, trading at 12.5. The dollar is unchanged today and oil is up .4% to trade around $66.40/barrel. Bonds are mixed in early trading. Treasuries are down a bit, while corporates and especially junk bonds are trading higher. The SPDR High Yield Bond ETF (JNK) has not done well this year, but over the past two weeks has begun to recover. The 5-year and 10-year Treasury yields are currently up around 2.81% and 2.96%, respectively. Don’t miss the fact that those yields are essentially right on top of one another. The yield curve is still flattening; the difference between the 2-year and 10-year yields is just 43 basis points. The reason is that the Fed is raising short-term interest rates at a faster pace than inflation expectations are pushing up long-term rates.  

Last night marked the first ever meeting between sitting heads of state of the US and North Korea. The result was without much detail but the two sides did agree to reestablish diplomatic relations. President Trump and Kim Jong Un signed a document pledging security guarantees to North Korea in exchange for that government’s commitment to full denuclearization of the Korean peninsula. Afterward, Mr. Trump said Kim had promised to halt nuclear testing, which if true, is significant. The president said there will be more meetings to come. Strangely enough, Mr. Trump said in a press conference that he believes Kim will abide by the agreement. If true, he may be the only one with that sentiment.  

The Consumer Price Index (CPI) accelerated to 2.8% y/y growth in May. For some context, CPI is now at the high end of its range over the past six years. Economists generally expected retail price inflation to rise; the trend has been gradually higher over the past year. A big part of the reason is that oil/gasoline prices are rising. We know that commodity price inflation is climbing faster than wages. The Labor Department says real wages—adjusted for inflation—are flat with year-ago levels. This report is not a cause for alarm because the absolute level of inflation is still fairly low. But we do want to see some wage inflation to prop up consumer spending. 

CNBC released results from its most recent survey of professional investors. Respondents now expect the SPX to end the year 2% higher than current levels. Economic growth (GDP) is expected to remain pretty strong. Interest rates will continue to march higher--the 10-year Treasury yield should end the year around 3.23%. Investors still expect either 3 or 4 Fed rate hikes this year. And crucially, 62% believe the Fed will continue raising rates until it chokes off economic growth.
 


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