FOCUS ON INFLATION & THE FED

Stocks opened mixed this morning (Dow -13 pts; SPX +.2%, Nasdaq +.5%). The best performing groups in early trading are semiconductors and biotechs, both up about 1%. Banks are being dragged down by the theatrics of congressional testimony by major bank CEOs today. Retailers and industrials are also down a bit. The dollar is stronger against a basket of foreign currencies after the European Central Bank (ECB) reiterated warnings over slower economic growth and said it plans no interest rate hikes in the foreseeable future. WTI crude oil bounced back toward $64.20/barrel today despite the stronger dollar. Bonds are trading higher as well. The 10-year US Treasury yield backed down to 2.4% after today’s economic reports (see below). The iShares 20+ Year Treasury Bond ETF (TLT) is up .27% and the iShares Investment Grade Corporate Bond ETF (LQD) is up .3%.

The Consumer Price Index (CPI) jumped more than expected in March due to higher prices for food & gasoline. Headline CPI accelerated to 1.9% from year-ago levels vs. 1.5% in February. On the other hand, Core CPI, which measures retail price inflation excluding energy and food, settled down to a 2.0% annual rate vs. 2.1% in the prior month. So core inflation is still very tame. Digging into the details, prices for manufactured goods (i.e. clothing) actually fell due to a rising dollar, but prices for services were up modestly. By the way, is true that the Labor Dept. changed its methodology in calculating CPI, specifically as it regards collection of data from a certain large department store. This probably dragged down clothing prices a bit. But the effect isn’t likely significant. We like to compare CPI with another inflation gauge developed by the New York Fed, called the Underlying Inflation Gauge (UIG). The two are pretty close; UIG is running at 1.9%.

Real average weekly earnings for US workers decelerated a bit in March according to the Bureau of Labor Statistics (BLS). Compared with year-ago levels, earnings were up 1.3% in March vs. 1.6% in February. This index measures “real” or inflation-adjusted wage growth. So borrowing the 2.0% inflation reading from the above paragraph, nominal wages are growing at a 3.3% annual rate. That’s neither too hot nor too cold as far as the Federal Reserve is concerned. Today’s economic reports certainly won’t encourage the Fed to resume interest rate hikes.

Speaking of the Fed, its monthly policy meeting will conclude today, accompanied by the usual press release. Traders will try to create some market volatility around the event.


*The foregoing content reflects the author's personal opinions which may not coincide with the opinions of the firm, and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk. Asset allocation and diversification does not ensure a profit or protect against a loss. Finally, please understand that–as with other social media–if you leave a comment, it will be made public.