Investors Ignore the Threat of Inflation… But How Long can it Last?
The labor market added 313,000 new non-farm jobs in February, well in excess of the 205,000 expected. In addition, the prior two-month total was revised upward by 54,000. The unemployment rate fell to 4.0 percent, the lowest rate since the end of 2000. As eye-popping as those gains were, the bigger surprise was contained in the pace of average hourly earnings. After rising to a twelve-month increase of 2.9 percent in January, investors were bracing for a repeat in February, just two weeks ahead of the next Fed meeting. Instead, earnings growth moderated to a twelve-month pace of 2.6 percent, pushing aside for the moment at least, worries of incipient inflation.
In all likelihood, the jobs report did little to convince the Fed that it should proceed more slowly along its intended rate path. On the contrary, the sheer strength of the reported jobs growth makes it more likely that wages will continue to firm in the months ahead, as long as the Phillips curve still pertains. On the day, the yield on the ten-year note rose four basis points to 2.90 percent and the two-year rose two basis points to 2.27 percent.
Investors Turn Their Attention to the European Central Bank
Not all of the policy focus was on Washington, as the European Central Bank (ECB) took an initial step away from its own exceedingly accommodative policy stance. Following its meeting on Thursday, the ECB released a statement that dropped language promising to increase the size and pace of its quantitative easing program should conditions warrant. And while no meaningful actions were actually taken, the change suggests a bank that is increasingly confident that the Eurozone economy is strong enough to be sustainable and return inflation to its target of close to 2 percent. Overall for the week the dollar firmed slightly, holding onto its gains of the previous two weeks.
The S&P 500 ended the week at 2786, its highest close since February 1 as the correction was beginning to accelerate, and now sits just 3 percent below its January 26 high. Friday’s surge was led by the cyclical groups that have become increasingly in favor, including financials, industrials and materials. They were joined by technology and energy stocks as well. It was the defensive, interest rate sensitive sectors that lagged. The strength in equities last week was not just confined to the U.S., however. Last week, the EuroStoxx 50 index rose on each of the five days to post a 2.9 percent gain. The Nikkei index also added 1.4 percent, and the MSCI EM index rose 1.8 percent.
The Consumer Price Report to Unveil More on Inflation
Investors won’t have long to ignore the threat of inflation. The February consumer price report is scheduled for release on Tuesday. The year-over-year headline number is expected to rise to just 2.2 percent, however, up just 0.1 percent from January. The core rate is expected to remain unchanged at 1.8 percent. Beyond February, however, the pressure on the trailing twelve-month calculation ratchets higher as two of the next three monthly reports will be replacing negative readings from last year.
The rest of the economic calendar is active this week with scheduled reports for retail sales, industrial production, housing starts and consumer sentiment. And looming on the horizon is the next Fed meeting on March 20-21. And while the overwhelming expectation is that the Fed will deliver another quarter point rate hike, Chicago Fed President Evans, an alternate member of the Federal Open Market Committee this year, last week expressed his preference for no rate hike in March. Markets say otherwise.
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Past performance is not a guarantee of future results.
S&P 500 Index: Is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
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- Chief Market Strategist, Ameriprise Financial
- More than 30 years of experience in the investment management industry
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