U.S. markets remain on edge in apparent anticipation of some good news with this week’s inflation report.
The Week That Was
There were no significant economic reports last week. There is plenty of information on the way this week.
Things to Come
The most important news this week will be tomorrow’s CPI report. Expectations are for an increase of 0.1 percent to 0.3 percent for both the total and core measures, respectively. If these are correct, both the yearly and six-month inflation measures would remain in the 3 percent to 4 percent vicinity.
We expect the underlying inflation rate to come in at close to the 3½ percent figure and that it will be moving slowly to 3 percent by the end of the year.
On Wednesday, expect producer prices to be roughly similar to the monthly changes in
consumer prices.
Also on Wednesday, the government will report advance retail sales estimates for October. After soaring at an 8 percent annual rate for the past three months, and over 6 percent for the year ending in September, sales are overextended. Look for a relatively weak to down report for October sales.
On Thursday, the homebuilders will report their November confidence indicator. October’s report showed a decline to 40 (break-even is 50). The November index will likely remain close to 40.
Also on Thursday, the Fed reports its estimate of October manufacturing production. Look for a ½ percent decline due primarily to the now-settled auto strike.
Friday’s report on housing starts and permits should show housing activity remaining down by roughly 20 percent from the spring of last year.
Market Forces
After market gains of 4 percent to 6 percent two weeks ago, last week most indexes had relatively small moves.
The exception is the small cap ETF’s (IJR, IWM), which fell 4 percent.
Despite Thursday’s decline, both the S&P500 and the Nasdaq managed to remain above their 50-day moving averages. However, both indexes’ 10-day averages remain below their 50-day averages—not a very positive sign.
Thursday’s downward stock moves were accompanied by a sharp upward reversal in interest rates. Federal Reserve Chair Jerome Powell simply restated his often-pronounced view that the Fed will raise rates if necessary to contain inflation. With another CPI report due this coming week, Powell’s comments helped dampen the growing optimism over a near-term decline in interest rates.
The recent sharp interest rate decline appears to be an overreaction. Markets seem to have anticipated a near-term rate decline. Instead, expect inflation to remain in the 3 percent to 4 percent vicinity. That is too high for the Fed to cut rates any time soon.
As for stocks, we continue to anticipate downward pressure due to the Fed’s ongoing selling of securities. A rising stock market is an anomaly during any extended period of monetary restraint.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 14 percent
Monetary Policy: restrictive
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