The type of move to the downside to which we have been treated over the past two weeks doesn’t simply stop on a dime. It will take time for investors to recalibrate risk/reward. Equities will no longer be trading in a vacuum. In fact, monetary policy and interest rates will now play a more historically rooted role in the allocation of risk. That means that equity selection will become more strategic. As I indicated in my annual “Year Ahead” note at the end of December, 2018 will be a more challenging year for investors. Rising interest rates as a result of eventual above-target inflation, tightening labor market conditions and several other themes will play a hand in making the investing landscape less myopic and as a result more challenging.
This week’s economic calendar will provide investors with some data with which to gauge the trendline for inflation, as well as the health of the overall economy. With a focus on inflation, the CPI reading for January is released on Wednesday. Bloomberg consensus is calling for a M/M reading of 0.3% versus December’s 0.1%. The Y/Y reading is expected to come in at 2.0%. Less food and energy, the M/M is expected to come in at 0.2%, and the Y/Y is expected to be 1.7%. It is important to note that if Bloomberg consensus is accurate, these readings will not reflect a meaningful uptick in inflation. The Atlanta Fed Business Inflation Expectations report for February is released on Wednesday at 10:00 AM EST. Last month the Y/Y reading came in at 2.0%. Again, not an alarming data point and should not trigger a meaningful uptick in investor concern–as long as it is in line with the previous month.
Investors will be keeping a very close eye on the EIA Petroleum Status Report on Wednesday as well. As we have discussed at length here in the note, US production has been ramping up dramatically in recent months. As a result, we are finally beginning to see a build in inventories. For the week ending 2/2, crude, gasoline and distillates inventories all rose; 1.9M bbl, 3.4M bbl, and 3.9M bbl respectively. Those builds coupled with expanding US production are helping to contain WTI crude pricing in an expanding domestic and global economy.
On Thursday we receive the Producer Price Index – Final Demand (PPI-FD) reading for January. Bloomberg consensus is calling for a M/M reading of 0.4%. December’s reading was -0.1%. The Y/Y reading for December was 2.6%. A reading at or below 0.4% would help tame volatility to a degree. Weekly Jobless Claims, out Thursday, will most likely provide further evidence of additional tightening in the employment market. Bloomberg consensus is calling for the weekly total of claims to be 229k for the week ending 2/10. The prior weekly reading was 221k. On January 29, the 10-week average fell to a 45-year low. Though this a great news for American workers and does speak to a healthy job market, investors have shifted the focus from a healthy job market to the prospects of inflationary pressure as a result of labor force tightening.
On Friday, Import and Export Price data is released for January. Bloomberg consensus is calling for an import price M/M reading of 0.6%. The export M/M is expected to be 0.3%. The last data release of the week, Baker-Hughes Rig Count, will likely reflect another rise in total rigs for North America. Last week’s reading was 1,300, up from 1,288 the previous week.
Investors head into the week a bit shell-shocked after a week that saw the Dow Industrials move an aggregate of close to 20,000 points in both directions.
Friday’s reversal certainly helped investor psychology in that most were expecting a washout trade heading into the weekend. Friday’s reversal was significant. It provided for a lift to index prices that saw indices close above a 10% correction. Additionally, it came on Friday– allowing for a break in the global trade and an opportunity for a reset. The welcome reversal on Friday was led by financials, healthcare, technology, telecoms, and utilities.
Flickr photo: Dusty J
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