Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Not Quite a Hawk or Dove – More Like a Loon?
The Fed raised rates by 25bps to 2.00% and increased its forecast for hikes this year to 4 (from 3), citing an uptick in economic activity. The ECB discontinued its QE program, yet offset that decision with a promise to stay flat/accommodative on rates through mid-2019. Traders viewed the Fed as hawkish and the ECB as dovish – all of which was rather unexpected. In response, the market flip-flopped; equity losses here in the States were largely offset by the bullish sentiments created overseas. However, any potential momentum generated by the ECB’s remarks was cut short on Friday when Trump announced another round of tariff proposals ($50 billion) on Chinese goods. Market response was mixed, but leadership in stocks was narrow, restricted to the high flyers (FANGs) and a few media stocks, thanks to the approved AT&T merger with Time-Warner.
The other interesting tidbit, though not new to readers of this column, is that the yield spread narrowed again – this time by 5 basis points to 36.0. That’s an interim record thus far, I believe. I keep bringing it up because of the negative effect it must be having on margins in the financial industry and the ongoing speculation in stocks. The higher cost/lower growth profile will eventually force many in these fields to change their leveraged strategies.
The data this week showed that inflation was not exactly tame – both US import and export prices jumped in May by 0.6% – that’s 7.2% annualized. In the same month, CPI was up 0.2% and PPI 0.5% (6.0% annualized). Granted the 0.8% spike in US retail sales and/or tariffs may have had something to do with the exaggerated price movement. We’ll have to wait and see just how much inflation sticks to the system when those sales taper off. This could be as soon as next month, since US industrial production (-0.1%) and the SIC manufacturing survey (-0.7%) have already turned negative as we head into June.
As for the metals, I continue to shudder every-time gold gets smacked along with stocks, as it did Friday. The inflation being produced is more a function of what I believe are irreparable supply/demand imbalances in the bond market rather than demand-pull dynamics in the economy. This will change, as it’sonly a matter of time until someone notices that short-end rates are moving higher with – or, more to the point – without the Fed’s and/or the economy’s assistance. In any case, gold prices, for the most part, don’t seem to go down very well. Bargain shoppers have regularly appeared above the lower moving averages. Next week we have the BoE, OPEC, and US Housing Data.
VP Investment Management