January Data Bullish; Potentially Too Much of a Good Thing
The continued strength in the U.S. macroeconomy triggered some unexpected volatility in the equity market during the first week of February. Paradoxically, several days of market weakness were attributed to the fear that an accelerating economy would trigger more restrictive action from the Fed and its new Chairman Jerome Powell. It should be noted, however, that recent history suggests market volatility is to be expected with the appointment of a new Fed Chair.
The view that the macroeconomy is enjoying a period of robust growth is supported by January’s economic reports; however, the bullish sentiment was slightly tempered by subsequent reports. For many market participants, the sell-off in stocks may have been welcomed as it signaled that sobriety is returning to an equities market that has reached historic highs, both in absolute and relative terms.
On the positive side, January’s early economic readings were quite bullish. The Purchasing Managers’ Index (PMI), which is regarded as a forward indicator of GDP, continued its upward climb with the service industry expanding the most in a decade. In addition, the labor market continues to tighten and wages appear to be accelerating. The lack of wage inflation has allowed the Fed to have patience in raising its benchmark rate. However, the current trend may compel the Fed to pick up its pace.
As the month continued, there were modest offsets to the highly constructive data. Existing home sales and new home construction both showed meaningful, albeit modest, negative changes. Initial jobless claims exceeded estimates, but the unemployment rate remained unchanged (which may be explained by an increasing workforce participation rate). Headline retail sales also fell slightly short of expectations and were halved from December. Consumer sentiment declined month-over-month to 94.4 from 95.9 respectively.
Going forward, investors will remain focused on the number of Fed rate increases in 2018. As it stands, the biggest variable seems to be the rate of inflation in the economy.
Commercial Paper Yields (A-1/P-1)
Current Economic Releases
|GDP QoQ||Q4 ’17||2.60%|
|US Unemployment||Jan ’18||4.10%|
|ISM Manufacturing||Jan ’18||59.10|
|PPI YoY||Dec ’17||3.30%|
|CPI YoY||Dec ’17||2.10%|
|Fed Funds Target||February 8, 2018||1.25% – 1.50%|