Today’s release of the minutes from the Federal Reserve’s January 30-31 meeting show the central bank estimate economic growth at 2.5% for 2018 and noting that the outlook for stronger economic growth raised the likelihood for continued, gradual interest rate increases. Fed members felt that it was increasingly probable that the economy would hit its inflation target of 2%.
Before this market rout and from the safety of the World Economic Forum in Davos, hedge fund legend Ray Dalio talked about the coming bear market in bonds and likelihood that we were near the end of this cycle of economic boom. Sometime in the next two years, he remarked, we were likely to experience a recession and that would put an end to one of the longest periods of economic growth in the United States. With the experience of the big market rout of January 26 through February 8 behind us–if it indeed is–when the Standard & Poor 500 stock index fell 9.03%, I’d like to make Dalio’s comments a little more explicit and apply them more directly to the stock market.
As of yesterday the Standard & Poor’s 500 stock index has climbed 5.8% in the last five trading sessions. That recouped much of the 9.03% drop (not quite an official correction of 10% or more) from January 26 through Februry 8. Which, of course, raises the question of what lies ahead–A rapid climb back through the old high of 2872.87 to new records (a classic V-recovery) or a move back to near the old high, followed by a failure at that level and a deeper correction of, say, 15%?
No index here with the headline clout of yesterday’s CPI (Consumer Price Index) but the message from three indexes today reinforces the story in yesterday’s CPI data: inflation pressures are increasing. The Empire State Manufacturing prices-paid index published by the Federal Reserve Bank of New York climbed 12.4 points to 48.6 in February. That’s the highest level since 2012.
Headline CPI (Consumer Price Index) inflation climbed 0.5% in January, the Labor Department announced today. That was above the 0.4% increase expected by economists surveyed by Briefing.com. Core CPI, which excludes more volatile food and energy prices, climbed 0.3% in January. Economists surveyed by Briefing.com had expected a 0.2% increase.
Investors and traders don’t have just the volatility from the CPI inflation report tomorrow to worry about. An unexpectedly strong or weak inflation report could send stocks and bonds soaring or tumbling. There’s also the expiration of options on the CBOE S&P 500 Volatility Index (VIX) tomorrow.
After getting their heads handed to them when volatility rocketed to 37.32 on the VIX on February 5 from 11.33 on February 1, low volatility traders were back today betting the the CBOE S&P 500 Volatility Index (VIX) would continue its fall from 25.61 at the close today. That’s another drop of 11.87% today. After that 230% move to the upside, which resulted in some low volatility ETFs recording 90% losses, the VIX is down 31.4% from its February 5 high.
The Standard & Poor’s 500 and the Dow Jones Industrial Average both finished in the green today, up 1.39% and 1.70%, respectively, after having held off a bout of selling around 3:46 p.m. New York time. Volatility also made progress on returning to normal.
The big, market-shaping news will be the CPI (Consumer Price Index) inflation report before the market opens on Wednesday. Since this decline began on February 2, the driving fear has that the stimulus in the Tax Cuts and Jobs Act, first, and now the $300 billion in new higher spending in last week’s legislation to fund the government for the next two years, and the still pending $200 billion in new money from infrastructure would kick off higher inflation in an economy that may (and this is a key area of disagreement among economists) be already running at full capacity.
The U.S. economy added 200,000 jobs in January, the Bureau of Labor Statistics reported this morning. Economists surveyed by Briefing.com had expected the 180,000 net new jobs. The official unemployment rate remained at 4.1%. The big news, though–the news that has rattled the bond market–is the increase in average hourly earnings
As expected the Federal Reserve left interest rates unchanged today. But in its post-meeting statement the central bank added language that Fed watchers thought indicated four interest rate increases in 2018 rather than three. That language was enough to put the brakes on a good start to the day for stocks. The Standard & Poor’s 500, for example, dropped from 2832.94 at 2 p.m. New York time to 2813.45 at 2:50 on the Fed’s statement.
So much news. And so much that has the potential to move the financial markets. Let’s start on the economic side, ok? Monday we get reports on personal income and inflation. And on the earnings side? Lots and lots of reports that could change the tone of this market. The biggest are Microsoft, (MSFT), PayPal (PYPL) and Facebook (FB) on Wednesday January 31 and then Alphabet (GOOG), Apple (AAPL) and Amazon (AMZN) on Thursday, February 1.
