After a worrying 0.5% jump in January, headline inflation as measured by the Consumer Price Index increased by just 02.% in February. That was right on the 0.2% mark expected by economists surveyed by Briefing.com. Core inflation, which excludes more volatile food and energy priced, rose 0.2% in February, again right at economist projections, after a 0.3% rise in January.
The U.S. Treasury sold $28 billion of three-year Treasury notes and $21 billion of 10-year notes today–and the price of the 10-year note actually climbed, taking the yield down to 2.87%, three basis points lower than Friday’s 2.90% yield. This was a good result for the bond market and for the U.S. Treasury
It’s only March but I’m rethinking my take on 2018.When the calendar pages turned over into 2018, my take on the year was that for stocks the first half would be much like 2017: Despite rising interest rates from the Federal Reserve, there was enough earnings growth to move stocks up even from near record highs. The bond market would be more problematic with those interest rate increases keeping downward pressure on bond prices and upward pressure on bond yields. With inflation still relatively quiescent, though, the downward trend in bond prices would be relatively gradual. It was the second half of the year that investors had to worry about, I thought then.
The Federal Reserve’s Beige Book economic report, based on anecdotal information collected by the 12 regional Federal Reserve banks, shows that a tight U.S. labor market is generating wage increases in most of the country and is leading to “moderate inflation.” Prices increased in all regions
In his testimony this morning before the Senate Finance committee new Federal Reserve chair Jerome Powell said, There’s “no evidence of the economy overheating.” Today’s economic data have raised doubts in the market about Powell’s conclusion.
This morning–before the actual testimony by Fed chair Jerome Powell had ended but after Wall Street had read his prepared remarks–stocks moved ahead on Wall Street’s favorite story, Goldilocks. Powell seemed to be saying that economic growth was getting stronger, but that it wasn’t so strong that it would force the Fed to act more quickly. But then as the market actually heard Powell speak, it began to reassess how this story comes out.
On Thursday February 22, Goldman Sachs said in a note to clients that the economic macro data as likely to be “as good as it gets.” This isn’t, in my opinion, a call for an immediate plunge in the markets. But with U.S. stocks trading near all time highs, I think the Goldman note is something all investors need to take seriously. Or at least the question it raises needs to be taken seriously. Here’s the question: If stocks are at all time highs and the economic data on economic growth, inflation, interest rates, etc. are as good as they’re going to get for this cycle, why should stocks move higher?
Ahead of congressional testimony tomorrow by new Federal Reserve Chairman Jerome Powell, Wall Street is buzzing with speculation that the Powell Fed will be willing let inflation run higher than its current target of 2%. Maybe as high as 2.5%.
A market with an obsessive interest in inflation will get plenty to obsess about this week. On Monday, February 26, Randal Quarles, the new vice-chair for regulatory supervision at the Fed, delivers a speech titled An Assessment of the U.S. Economy at the 34th Annual National Association for Business Economics conference. On Tuesday morning, new Fed chair Jerome H. Powell delivers the Fed’s Semiannual Monetary Policy Report to the Congress to the House Financial Services Committee. And on Friday government statisticians deliver the PCE data on inflation
If you’re trying to predict how tight the labor market is–and from that how fast wages and inflation and interest rates–might rise–there’s nothing more important than the puzzle that is workforce participation. The percentage of the potential workforce that is actually working has been stuck at historic lows. And despite the economic recovery participation rates haven’t climbed significantly. If fewer workers who could work are working, then wages are likely to be under more rather than less upward pressure. And now a new report from the Federal Reserve Bank of Kansas City says that men in their prime working years have left the labor force at an astonishing rate and they may never return unless the nature of the U.S. job market changes radically.
Traders and investors decided today that the Federal Reserve’s semiannual monetary policy report to Congress is wrong and that Wall Street’s own seers are right about wage-driven inflation. The Fed’s report, delivered to Congress today, makes it clear that the bank sees the labor market at or beyond full employment. On the other hand, Wall Street strategists keep saying, It’s different this time.
Yesterday, U.S. stocks moved higher in the morning and then continued upward until traders and investors had a chance to think twice about the minutes from the Federal Reserve’s January 30-31 meeting.
