Inflation > Growth (For the Moment?) – June 29, 2018

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

Inflation > Growth (For the Moment?)

Effectual bank stress tests and perhaps month-end gaming insulated stocks from Trump’s escalating pursuit of tariffs and/or investment controls. I won’t get into the details, which are readily available on the web. Suffice it to say that the stress tests have always been self-serving, being invariably conducted by people within the banking sector. As for Trump’s tariffs, I would say that, at the very least, they have created a long overdue debate about trade imbalances and currency manipulations that have cost the US trillions of dollars over the last several decades.

Stocks finished a fairly volatile week on the soft side (see the scores), in part due to a late-day slide in stocks during Friday’s trade. There was no particular reason that I could see for the selloff, which may be an early indication of fatigue and/or more selling to come as we head into next week.

Away from all that, the released economic data did very little to indicate that the economy is firing on all cylinders. Inflation (ex tariffs) seems to be outpacing growth, which has been overstated because of abnormally high spending to recover from natural disasters. First quarter GDP data gave us quite a bit to consider in that regard. Consumption Expenditures fell from 1.0% to 0.9% at the same time the GDP Price Index rose from 1.9% to 2.2%. Then, for May, US Personal Spending fell to 0.2% from the disaster-induced 0.5% (revised down from 0.6%) in April, and Durable Goods orders fell 0.6%. Recall that it was the 0.6% increase in spending that fueled a massive short squeeze in stocks, especially retail, between mid-May and mid-June. Fed surveys from Dallas, Richmond, and Kansas City showed increases in both prices paid and prices received that outpaced the majority of other components. New Home Sales added 6.7% (though April data was revised lower by 2.4%) and Pending Home Sales fell 0.5%.

Turning back to the action, Treasuries were stronger across the curve, though there was no change in the yield spread (2 vs. 10), which remained near 33. Crude oil spiked to 74.25/bbl as the US asked its allies to refuse imports from Iran and US inventories showed an unexpected decrease. Commodities (to include the metals) were mostly softer on increased trade concerns. Gold in particular was seen testing support around technically significant levels and/or round numbers, with 1,250 serving as the latest battleground. The US dollar finished the week relatively unchanged. Next week, we’ll have a look a US jobs and the latest FOMC minutes.

Best Regards,

David Burgess
VP Investment Management


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