The Week That Was
Once again, there was positive economic news this past week. If we discount the effect of energy prices, monetary inflation was almost nonexistent in February. Soaring energy prices did push total consumer prices up at a 3 percent annual rate. Both measures of inflation remained below 2 percent on a year-over-year basis.
Weekly employment reports show the good news continued this past week. Initial unemployment claims for the first week in March fell to 712,000.
Recent declines moved the four-week average to roughly 750,000, down 100,000 from the average from October through January.
The number of people receiving unemployment payments also continued to trend lower. In late February the number fell to 4.1 million, down from 5.1 million a month earlier.
Today’s report on February producer prices shows a ½ percent increase for the month and a 3 percent increase for the year. These increases are early signs of coming inflationary pressures which will intensify in the year ahead.
Things to Come
The good news is likely to continue next week.
Tuesday’s Homebuilders’ Index for early March should remain in the mid-80s. The housing market is booming in the suburbs as safety concerns cause people to flee major cities.
I believe Tuesday’s report on retail sales and manufacturing output will also show the party continues. Retail sales in January were almost 8 percent above their previous peak a year ago.
In addition, real disposable income was more than 12 percent above its prior peak of a year ago. This indicates there is plenty of spending power to drive retail sales higher.
Business surveys show manufacturing output was very strong in February. Based on these surveys, we should expect the Fed’s report to show manufacturing is up by 1 percent to 2 percent, hitting a new all-time high.
After Fed Chairman Jerome Powell’s recent testimony to Congress, there will be nothing new coming out of Wednesday’s Fed meeting.
Stock prices moved decisively higher this week. Small cap indexes (IWM, IJR) led with gains of 9 percent for the week. The Nasdaq rebounded from 10 percent below its peak to 5 percent below. The Dow and S&P500 increased by 4½ percent and 3½ percent, respectively.
News reports credited the $1.9 trillion stimulus bill for the rebound. The idea is there will be a flood of spending as the federal checks get cashed.
I also expect a flood of spending, but not from government checks. When the Treasury borrows $1.9 trillion to pay for the checks, it takes that entire $1.9 trillion of spending power out of the economy.
The reason spending will soar is because the Fed will buy all the new debt. This is the real source of the increase in spending. The Fed will also be the source of much higher inflation and much higher interest rates. The party in the stock market can continue as long as the Federal Reserve keeps filling the punch bowl.
The first signs of trouble in financial markets will come as inflationary expectations drive longer-term interest rates above the yield on stocks and as the spread between short- and longer-term interest rates begins to narrow.
Stocks continue to yield more than bonds. The spread between short and longer-term rates is widening rather than narrowing. As long as this continues, monetary policy should continue to provide a tailwind for stocks while limiting any downturn.
Party on—while you can.
Economic Fundamentals: positive
Stock Valuation: S&P500 over-valued by 18 percent
Monetary Policy: highly expansive