The major stock market averages are mixed in early trading (Dow -70 pts; SPX +.5%; Nasdaq +.6%). Gold miners, healthcare, and energy exploration stocks are all up about .7% to 1.2%%. On the other hand, airline and aerospace names are trading lower, paced by Boeing (BA) down 6.7% after the Ethiopian Airlines jet crashed. Retailers and consumer staples names are flat to down at the moment. The US dollar is weaker today after a softer inflation report (see below), and not surprisingly, commodities are trading higher. WTI crude oil is back up around $57.22/barrel. Copper is up .5% today and 12% on the year, reflecting optimism over a potential trade deal. Copper is sort of a commodity trader’s referendum on the Chinese economy, since China accounts for half of global copper demand. Bonds are mostly higher today as yields tick lower. The 10-year Treasury yield fell to 2.63%, the lowest in the past 6 weeks.

On Friday, Federal Reserve Chair Jerome Powell said he sees “nothing in the [economic] outlook demanding immediate policy response.” In other words, the Fed won’t be hiking interest rates in the near future because economic growth is slowing and inflation is tame. He is now preaching a “patient wait and see approach...” In addition, he said interest rates are “within the broad range of estimates of the neutral rate.” This is a very different message than he delivered consistently last summer and fall (i.e. we’re a long way from neutral and the economy is very strong). And yet, in a 60 Minutes interview over the weekend, he indicated his belief that the economic cycle can continue for years. “There’s no reason why this economy cannot continue to expand.” Certainly, the Fed is riding the fence to avoid roiling capital markets.

While rate hikes are on pause, however, the Fed is still shrinking its balance sheet by $50bil per month. And this is a form of monetary tightening. But even here, Mr. Powell has given in to the demands of investors. He now says the Fed will not seek to reduce its balance sheet back to pre-crisis levels. At the current rate, the balance sheet could reach its “new normal” size by the end of the year. “In some ways, we are returning to the pre-crisis normal. In other ways, things will be different.”

The Consumer Price Index (CPI) slowed to 1.5% in February from 1.6% in the prior month. Retail inflation has moderated over the last seven months, mostly due to falling oil prices. Excluding the more volatile food & energy categories, Core CPI eased to a 2.1% annual rate from 2.3% last summer. It’s been a tug-of-war between cost pressure due to trade tariffs, and deflationary pressure from slowing global economic growth. The result is very stable, tame inflation. At the same time, US wage growth is accelerating and that should prop up consumer spending.

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