Inflation Heads Toward Record Pace

Today’s employment report shows strong gains in February. The U.S. economy continues to grow rapidly. Expect record inflation as the Fed’s policy and the invasion of Ukraine contribute to upward pressure on prices.

The Week That Was

Today’s February employment data show private payrolls rose by 654,000 and the unemployment rate fell to 3.8 percent. The number is up at a 5½ percent annual rate from the fourth quarter average.

In spite of significant increase in jobs, February’s total is down 1 percent from the pre-Covid total in February 2020. Hours worked and average hourly earnings are also up from the fourth quarter averages, at rates of 4 percent and 5.7 percent.

February ISM surveys indicate businesses continued to expand.

Manufacturing remained in the vicinity of 60, consistent with real growth in the economy of 3½ percent. Feedback for service companies was slightly weaker, with the index down to 56.5 from 60 in January.

On balance, the feedback from business surveys continued to indicate business activity expanded at a 3 percent to 4 percent annual rate.

Things to Come

The only scheduled economic news this coming week is the February consumer price index (CPI), due on Thursday. It should show continued record-breaking inflation rates. Oil prices in February rose to $91, a 10 percent increase from January. Prices have since increased another 20 percent, to $110.

Business surveys report widespread increases in prices. It is difficult to know how much of this surge will get captured in February. What is not difficult to see is how inflation is getting much worse.

Russia’s invasion of the Ukraine and the isolation of Russia will mean even higher inflation in the months ahead.

Fed Chair Powell indicated the Fed would raise its key rate by only ¼ percent at its upcoming meeting. This reassurance of moderate moves in rates might have contributed to the slight downturn in longer-term rates.

The immediate outlook for stocks remains uncertain. With the S&P500 currently 25 percent overvalued and technical indexes mostly negative, investors should continue to take a cautious approach to investing in stocks.

Market Forces

Amid continuing devastation in Ukraine, stocks moved higher this week.

Small caps led with gains of more than 2 percent. The S&P and Dow were up just under 2 percent, and the Nasdaq and QQQs were up by ½ percent.

Technical stock indicators remain negative.

All the major indexes had difficulty at key resistance levels. On a positive note, the S&P500 held above key support at 4,200.

With Russia’s relentless pounding and Ukraine President Zelenskyy calling for negotiations, it appears the Ukraine’s days might be numbered. Putin has destroyed much of the key cities. In the process, Putin has also inflicted serious damage on Russia’s economy.

As long as the war continues, the economic fallout for Europe and the United States will rise. As the damage to both countries increases, reverberations through supply chains will create shortages for a number of products, sending inflation even higher than the recent 7 percent vicinity.

Outlook

Economic Fundamentals: mixed

Stock Valuation: S&P 500 overvalued by 25 percent

Monetary Policy: highly expansive