Displaying items by tag: inflation

(Washington)

US core retail prices came in soft in new data this week. The US core consumer price index, which excludes food and energy, rose 0.1% from the previous month and 2% from a year earlier in March. The readings both underperformed expectations, but are not considered indicative of a recession or any real economic trouble.

FINSUM: This data reinforces the idea that we are in a goldilocks moment with the economy. Let’s see if that continues. If it does, it sets up a nice environment for asset price growth.

(New York)

Do you remember those glory years between the taper tantrum and the end of 2017? The time when inflation was low, but not totally weak, growth was solid but not great, and the Fed decided to do nothing and say little? That was the time when the market surged. Well, those days may be here again as the economic signals right now, and the Fed’s language, are starting to look like they are returning to the post-Crisis “new normal” of moderate growth and inflation, but not enough to bring on a policy response.

FINSUM: Our own view is that we are not headed for recession, but rather a return to the pre-tax cut rate of growth and inflation. This is a solid setup for markets as it produces a dependable environment and a good atmosphere for corporate earnings growth.

(New York)

Tell us an investment that does well when inflation is rising AND when rates are falling? Most investments are sensitive to one or the other, but gold can benefit from both. Rising inflation (and rates) can lead to gold-buying as a hedge, helping prices, while falling rates make the metal’s zero yield look more attractive (and make it easier for overseas buyers). Yet, conditions in the middle of those two extremes—which have prevailed since the Crisis—are usually bearish for the metal, as it does not have a natural place in the portfolio in such conditions. That said, gold’s outlook is now the best it has been in years, as the economy is weakening and rates look likely to fall, weakening the Dollar and clearing the path for appreciation.

FINSUM: Gold is in the most interesting position we have seen for some time and we are inclined to think it might start to rise out the doldrums.

(Washington)

The bond market seems to have blind faith in the Fed right now. Longer-term bond yields have fallen dramatically, a sign that fixed income investors are sure the Fed is not planning any moves. Not only are bonds up considerably lately, but implied volatility is very low. That means investors are discounting both the chance for an inflation increase and an economic downturn. In other words, they think the economy and Fed is going to stay right where it is.

FINSUM: Can you blame them? The economy lingered in what we think of as an investor’s “goldilocks” phase for several years after the Crisis—inflation not too low, not too high, Fed on hold, asset prices rising. It does not seem unlikely we go back into that mode.

(Washington)

The market seems to have forgotten about 2013’s Taper Tantrum. The bond markets appear to feel like they are back in the driver’s seat, and seemingly no one expects the Fed to suddenly turn hawkish. A similar set up existed in 2013 prior to the big market meltdown referred to as the “Taper Tantrum”. The thing to bear in mind is that Fed chief Powell has made clear he doesn’t like being bossed around by the White House or the markets, so will not be afraid to be one step ahead of markets in making a sudden hawkish move. It is important to remember then that a survey of economists shows that they expect another rate hike this year.

FINSUM: The Fed is made up of economists, so that survey could have value. That said, we do lean towards the “no further hikes” in 2019 camp.