RISING INFLATION SAYS RECESSION NOT IMMINENT

Stocks gapped up at the open this morning, but quickly faded. The Dow is currently up 70 pts and the S&P 500 (SPX) is up .2%. Gains are broad-based, led by energy, semiconductors and transports. Defensive sectors like utilities aren’t really participating. The VIX Index has stabilized below 16 over the last week. Foreign stock markets are acting better—especially China—and that suggests some expectation for resolution of trade concerns. Traders are excited about the fact that the SPX closed above its 200-day moving average for the first time in over two months. The index is now only about 6.5% below its all-time high reached 13 months ago. So risk assets are acting better this year. The Bloomberg Commodity Index (BCOM) is up 4.5% so far in 2019. WTI crude oil is back up over $54/barrel. Iron ore and copper are also climbing. I’ll point out that while falling commodity prices were seen as a very scary sign of falling economic growth in 2018, very few are seeing the commodity recovery as a sign global economic improvement.

On his show last night, CNBC Mad Money host Jim Cramer identified five points arguing for continued investment in the stock market.

1) There is no need to fight the Fed, since they are now more dovish

2) President Trump wants/needs the stock market to rise, so presumably he will be more politically conciliatory

3) Inflation is not a problem and isn’t high enough to force further rate hikes

4) Corporate balance sheets look good

5) Stock valuations are attractive

We got some important inflation data this morning. The Consumer Price Index (CPI) decelerated sharply to 1.6% y/y in January vs. 1.9% in the prior month. The move was expected by economists due to lower gasoline prices, which have already begun to recover. Excluding the more volatile categories of food & energy, “core” CPI held steady at 2.2%. This is a Goldilocks number—not too hot, not too cold. Funny thing about inflation: the closer it gets to 2.5% the more investors will take it as a sign that the US economy is healthy and not at all close to recession. Simultaneously, acceleration toward 2.5% will probably force the Federal Reserve to resume monetary tightening, which could choke off growth and cause a recession.

Bloomberg economists believe inflation will gradually rise this year, partly because the labor market is so tight. Today we discovered that real average hourly earnings among US workers rose 1.7% from year-ago levels. That’s up from 1.4% in the prior month. Wages are finally beginning to rise—even adjusted for inflation.


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