The Week of Economic Reports, the Stock Market Tank and Inflation Fears in the Coming Week

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The week of February 9, 2018, was a wild ride in the stock markets, and despite the fear of rising rates, it wasn’t really all that crazy in the bond market. 24/7 Wall St. wanted to provide a brief outlook of this last week’s economic reports and some foreshadowing for the week ahead. This coming week we will get two key economic reports: 1) inflation (CPI/PPI) readings for January. and 2) preliminary consumer sentiment numbers for February. While the cut-off date for sentiment will dictate how positive the numbers are, the reality is that we had better be prepared for higher inflation readings.

With the U.S. stock market in formal correction territory of 10%, it turns out some of the emerging and intermnational markets are doing even worse.

It is hard to predict the annual inflation readings, but in January’s economic reports, and the December reports already out that were leading up to them, we have seen wage inflation, higher oil prices and multiple data pointing to higher costs and prices. Now add in all the recent pay hikes and the bonus checks. It leads to the chance of a strong inflation number — and if 2.9% isn’t wage inflation, then what is? There have been many factors in the stock market sell-off, but the wage inflation reported a week ago was what got this ball rolling.

What will supplement the reaction to next week’s inflation report is that we have seen stocks give back a lot as a psychological blow. We also have to see if the dollar resumes its weakening trend of the first month of 2018, as a weaker dollar makes the prices of imported goods go higher and higher. This was the worst week for stocks in years. We also have seen the energy market pullback with oil breaking back under $60. The wage costs are going to remain higher, but the input costs of energy and materials should keep a lid on inflation in the months ahead, if energy and commodity prices do not come screaming back up.

Here is a recap of the week’s full economic reporting from February 5 through February 9.

On Monday, February 5, 2018, the PMI Services report for January came out at 53.3 and was more or less as expected but down from 53.7 in December, but the ISM Non-Manufacturing Index came in at a more robust 59.9 reading for January, versus expectations of 56.2 and December’s 56.0 reading. Both reports lent more credence to higher prices, strong jobs and higher wages.

On Tuesday, the report for international trade in December showed a deficit of $53.1 billion in the month. This compared with expectations of −$51.9 billion from Bloomberg and −$50.4 billion in November. This points to bad news for the gross domestic product as deficits act against GDP. Imports were up 2.5% at $256.5 billion, while exports were up 1.8% to $203.4 billion.

While much talk about the jobs market concerns high payroll additions each month, tight hiring markets and higher wages, the JOLTS report from Tuesday, February 6, indicated that the number of job openings was down. There were 5.81 million job openings in December, compared with 5.98 million in December.

On Wednesday, the weekly EIA Petroleum report indicated that there was a weekly buildup of 1.9 million barrels of crude oil in the United States, compared with a 6.8 million barrel build the prior week. What hurt was that the prior week’s contraction in gasoline and distillates inventories were followed by sharp gains — up 3.4 million barrels in gasoline and up 3.9 million in distillates.

Lipper released its U.S. fund flows report on Wednesday, February 7. It showed weekly equity fund outflows of $23.9 billion and taxable bond fund inflows of $3.1 billion. This was after major inflows into stocks, and Merrill Lynch went bearish simply because of the massive inflows and because of record high sentiment, adding up to a contrarian’s dream.

Wednesday afternoon came a report on consumer credit levels for December. This rose by $18.4 billion from an upwardly revised gain of $31 billion in November. It turns out that November’s gain in consumer credit was a seven-year high.

The U.S. Department of Labor released weekly jobless claims for the prior week on Thursday, and the reading was down to just 221,000 new people filing for unemployment claims. The prior week’s reading was revised to 235,000 from a preliminary report of 230,000. Continuing jobless claims, what we call the army of the unemployed, were down by 33,000 to 1.923 million.

A late-Thursday report was issued by the Federal Reserve showing its balance sheet trends. This would never have mattered for many years, but now the Fed is looking to shrink the massive $4.5 trillion in Treasury, agency and mortgage debt it owns in the quest to normalize its rate policy. It turns out that the total holdings were up by $1.5 billion — but don’t panic, it’s still $4.42 trillion.

Friday’s report on wholesale trade inventory levels for December was up 0.4% from a prior 0.6% gain in November. Inventories are likely to see restocking gains at some point in the first quarter of 2018.

As of Friday, the Atlanta Fed’s GDPNow estimate for first-quarter GDP is 4.0%. Keep in mind that there has been a seasonal weakness around first-quarter GDP reports for years now, and it may skew the actual outcome versus what was still expected to be so strong in the first 40% or so of the first quarter of 2018.

Friday’s nonequity market levels looked rather interesting compared to the prior week:

  • Benchmark West Texas Intermediate crude was down 80 cents to $60.35 late Friday morning, but it was down by $1.30 and oil was back under $60 per barrel by noon. That was roughly $65 for most of this week, and it was above $66 on five different trading days in the second half of 2018.
  • Gold is supposed to be a safe haven — well sometimes. Gold was down around $1,317 per ounce late on Friday morning compared with a prior-day low of about $1,310 and a range of roughly $1,330 to almost $1,350 the prior Friday.
  • The yield on the 10-year Treasury note was last seen at 2.85%, up from 2.40% at the end of 2017.
  • The yield on the 30-year Treasury bond was 3.16% on Friday, and that was also up over 400 basis points since the end of 2017.
  • The U.S. dollar versus the euro was $1.224 late on Friday, versus $1.243 early on Monday and $1.25 on February 1. For a reference on what this backing off of dollar weakness looks like, the euro was at $1.20 at the end of 2017, at $1.17 at the start of November and at $1.05 at the end of February 2017.

Stay tuned for next week. It’s been a wild ride for stocks, but the fundamentals of the economy and the major companies do not really match up with what we have seen in this week’s market actions.