Stocks surged at the open this morning on better than expected economic data. The Dow is currently up 187 pts and the SPX is up .9%. Tech and healthcare sectors are leading the way, up over 1% in early trading. Banks, transports and biotechs are particularly strong. The VIX Index sank back toward 13.3, indicating waning investor fears. So far, the trading session can be characterized as broadly risk-on. Commodities are trading mostly higher. The Bloomberg Commodity Index is up .5% today, and 6% so far on the year. Crude oil rose to nearly $58/barrel, the highest level since November. Bonds are mostly selling off, with the exception of high-yield (or junk). After dipping to a 2+ month low, the 10-year Treasury yield ticked up to 2.62% today. Since the stock market bottomed on Christmas Eve, the 10-year yield is up only 7 basis points (or .07%). Typically, a huge run-up in stocks is accompanied by a sharp rise in yields. After all, better prospects for stocks usually causes investors to sell bonds. Not this time, and it’s mostly due to the Federal Reserve’s abrupt pause on monetary tightening.
The Producer Price Index (PPI), which measures wholesale inflation, slowed a bit in February to a 1.9% annual rate. The rate of wholesale price growth has been declining since last summer, partly due to falling energy prices and partly due to slowing global economic growth. Excluding food & energy, Core PPI slowed to 2.5% vs. 2.7% at the end of 2018. The bottom line is that inflation remains tame.
At the same time, January’s Durable Goods Orders report confirmed that corporate capital spending is holding up. That’s a big deal. New orders for capital goods (excluding defense equipment & aircraft) rose .8% in January from prior month levels, compared with economists’ consensus forecast of .2% growth. On a year-over-year basis, orders accelerated to 3.1% growth. One big worry among investors is that the trade war, growing political uncertainty and slowing global economic growth could cause CEOs to stop investing until the way forward becomes clear. But so far, the worst-case scenario hasn’t played out.
US construction spending bounced back somewhat in January following four very tough months in the fall. Investment in public construction projects surged to an eight-year high. Private projects, on the other hand, are declining. And private residential construction has been falling for the past eight months. As with a host of other data series, this report was delayed due to the government shutdown. The February construction report is due out in just two weeks.