Inflation Data Shows Decline; Market Yields Still Rise – May 11, 2018

Inflation Data Shows Decline; Market Yields Still Rise – May 11, 2018

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Inflation Data Shows Decline; Market Yields Still Rise

It turned out to be a week for the bulls. Trump’s campaign for lower drug prices, anticipated negotiations with North Korea, and withdrawal from the Iran nuclear treaty undoubtedly had some positive effect on the major indices. In my opinion, though, it was more about the technical milestones (moving averages) and perhaps the earnings season that is now winding down into the “no news period” that served as impetus for the gains. In any case, the major indices all added between 2% and 3% by the Friday close – led by the Transports after Fed Ex (along with Alphabet and Uber) won some government drone sweepstakes that were lost by Amazon. As for the technical reads on the indices, all but the Dow have broken out to the upside above their highest respective moving averages. I suspect we won’t see a resumption of any bearish action until the Dow joins/confirms the pack.

The economic data released this week was not especially bullish. Consumer credit usage has now come full circle. At $11.622 billion in March, credit card usage is off 62.0% from its post storm peak of $30.58 billion. Parenthetically, this will most likely have a negative impact on 2ndquarter earnings. US CPI data reflected a little bit of the same, registering a 0.2% rate of price increases in April. The year-over-year comparison came in at 2.5%, or 0.5% higher than the Fed’s mandate, but this didn’t stop the ongoing rally in stocks. The month-to-month figure of 0.2% was below expectations, which supported the notion that the Fed would rethink its planned rate hikes for later this year.

What was fascinating to me was that, despite the inflation news, the 2-year Treasury yield hit another interim high this week of 2.54%. This indicates, once again, that the bond market is operating by a completely different playbook, and is fast becoming the author of its own inflationary consequences. Equally interesting to me is what the Fed’s reaction will be to the duplicity. The inflation data is (temporarily) tempting them to hold off on any more rate increases even as the bond market practically forces them to do the exact opposite.

Away from that, oil continued to creep up this week after the Iran treaty fell apart. Green paper (i.e., the dollar) was a bit lower after more dovish speculation arose around the Fed – all of which helped to stabilize the metals in and around (in some cases above) their respective moving averages. Next week we’ll get more about trade with China and a relevant look at US retail sales with US consumers reining in their spending. At that point, we’ll know if stock bulls can push the indices higher on what should be relatively weaker news, not to mention persistently higher speculation costs emanating from the short end of the curve.

Best Regards,

David Burgess
VP Investment Management


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