Weighing The Week Ahead: Is It Time To Worry About Inflation?

The substantial economic calendar features inflation reports and housing, but also includes Michigan sentiment, the Fed’s Beige Book, and NFIB sentiment survey. We will also get the first earnings reports for the Q4 season. Of late, the calendar has not provided much of a clue to the upcoming market action. More than ever, we just know what to watch for. I am probably a little early on this week’s theme, but there are some signs of increasing interest among good sources. Some thought leaders are wondering: Is it time to worry about inflation?

With both the PPI and CPI reports this week, now is as good a time as any to consider this question.

Last Week Recap

In my last installment of WTWA, I anticipated a week-long focus on the U.S./Iran confrontation. That was the case, underscored by a retaliatory missile attack. And then? A pause for reassessment. Do we dare hope that this is the end of the military action? We are far from any solution to the underlying problems.

I also suggested that the economy would get less attention until Friday’s employment report announcement. By Friday, it did seem that market activity had returned to the “normal” of recent days – punctuated by tweets, accusations, and the impeachment and election stories.

David Templeton (HORAN) helped to keep things in perspective with a look at past shocks and the market impact.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. This week I am featuring the two different versions from Investing.com. This shows the effects of news in the hours when the stock market is closed.

Overnight futures declined sharply on the evening of January 7, as news of the Iran missile strike became public. Market participants (like us) were watching closely, monitoring events and planning trades. As often happens, it was best not to trade the overnight market. By morning there was word that no lives were lost and damages minimal. If you look only at the trading in market hours you would not know that anything happened. This is why I sometimes use the futures chart.

The market gained 0.9% for the week. The trading range was 2.1%, not including the decline in the futures on Tuesday night. You can monitor volatility, implied volatility, and historical comparisons in my weekly Indicator Snapshot in the Quant Corner below.

Noteworthy

How the STEM Crisis is Threatening the Future of Work is a provocative analysis from The Visual Capitalist. Check out their post for a giant chart laying out the entire argument. Here is one piece. I’m not sure I agree with the policy prescription, and I’m very interested in comments.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

New Deal Democrat’s high frequency indicators are an important part of our regular research. This report is fact-based. NDD is consistent with the package of indicators. Each has a source and often an accompanying chart. Here is the update of money supply, a subject of plenty of recent uninformed commentary.

NDD summarizes that the results remain positive in both the long- and concurrent-time frames, and the short-term forecast remains neutral. NDD continues to emphasize the split in producer and consumer indicators, something he is watching closely.

The Good

  • ISM services registered 55.0, beating expectations of 54.3 and November’s reading of 53.9. Jeffry Bartash (MarketWatch) explains the large and growing importance of the service side of the economy. He captures the key elements of the report, including some key quotations from respondents. Brian Wesbury takes a closer look at some of the individual components and concludes:

    At the end of the day, the service sector report from the ISM should be given more weight than the manufacturing report when it comes to the outlook on the broader economy, but the media loves negative news and these data simply don’t support their dour outlook.Fear sells, even when the fear isn’t justified.

  • ADP private employment for December showed a gain of 202K, soundly beating expectations of 155K and last month’s 124K (upwardly revised from 67K).
  • Initial jobless claims edged lower, to 214K. This beat expectations of 225K and last week’s 223K. The four-week moving average also moved lower. This is a widely-followed smoothing technique, but can react strangely when a very good or very bad week drops out of the average.

The Bad

  • Factory orders for November declined .7%. This was actually better than expectations of a 0.8% decline, but I cannot score it as “good” when October’s result was a gain of only 0.2%, downwardly revised from 0.3%.
  • The unemployment report for December showed a net gain of 145K workers, a bit lower than the expected 160K. The prior two months were also revised lower by a total of 14K. Hourly earnings increased just 0.1% versus expectations of 0.3%. November was revised upward to 0.3% from the originally reported 0.2%. There was also concern about the concentration of job gains in some apparently unlikely places. (clothing stores?) There are two distinct viewpoints on the employment series.

    • The slowing rate of growth is concerning to some. James Picerno describes the “nine-year low” as a gradual but persistent slowing.
    • Growth remains well above the levels required to maintain the record low unemployment. In a CNBC interview, Jan Hatzius mentions the weak points, but sees a strong labor market. He cites other wage indicators that are stronger. He explains the likely Fed reaction, comments on the change in the trade deal (a subtraction of negative growth), and comments on the reduction in manufacturing jobs. 2018 saw the tax cut and no trade war. 2019 showed a much greater trade effect. This interview covers several important and sophisticated points.
  • Rail traffic continues its deceleration. (Steven Hansen, GEI).

The Ugly

The Ukranian passenger plane crash, now known to have been the result of an Iranian missile attack. The Iranians blamed human error when air defense personnel had only ten seconds to identify the incoming flight, which they thought was a cruise missile. It was a time of increased US military flights around the Iranian borders, combined with the fear of escalation. Iran placed part of the blame on “US adventurism.” [CNN]

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