Politics and inflation expectations dominated financial media headlines during the week. The highly anticipated inflation reading failed to notably stir fear across market participants as the Consumer Price Index (CPI) was announced at an annualized growth rate of 2.2%, matching economists’ expectations. Although the reading is above the Fed’s 2% target, it’s important to note that we’re just now seeing healthy upside inflation, a concept that was largely absent from 2013-2017. In fact, our commentaries throughout that period discussed the potential threat of deflationary pressures and the risks they may pose to the aggregate economy. We reference the term ‘healthy inflation’ because it’s a necessary occurrence for economic expansion. If prices of goods remained stagnant, or even hinted at the notion that they will decline in the near future, current consumption patterns may shrink, ergo lowering corporate profitability, which may then lead to lower equity market prices, lower home prices, potentially lower economic productivity levels, and may even lead to slowing economic growth. Our main point here is that market participants, as well as consumers of the global economy (as we all are), stand to benefit from marginal inflation near or slightly above 2%. It promotes consumption, it promotes corporate growth, and, most importantly, it has the ability to boost hourly earnings growth (i.e. wage growth) above the growth of inflation. In our view, such an outcome serves as a benefit. As we look at the Federal Reserve for further guidance on their stance of inflation and their actions, it bares significance to know that the Fed has vowed to let inflation run “hot” for a slight period of time before acting in a more aggressive tone. The notion of “running hot” was not accompanied by a decisive percentage but our internal belief is that the Fed may allow inflation to run near 2.5% for a few months before initiating a more aggressive restrictive monetary policy.
Turning to the White House, President Trump’s former Secretary of State, Rex Tillerson, discovered that he was fired via a tweet from the President. It is rumored that Mike Pompeo, the current CIA director, will take his place. It remains unclear as to how such an action may influence the negotiation of global trade agreements or what may happen to the newly initiated steel tariffs. Rex Tillerson was believed to be a supporter of open trade and was not keen on the President’s steel tariffs. Moreover, Mr. Tillerson appeared to have a more neutral tone to the allegations of Russian involvement in U.S. politics. According to Bloomberg, Mike Pompeo supports the President in ways that Rex Tillerson did not. Such a statement produces further questions, in our opinion, as to what it may mean for trade deals moving forward. For now, we’ll simply have to wait for the Senate’s confirmation hearing.
Given the slew of news from the U.S., global equity markets remained largely neutral with a slight bias to the downside. The Standard & Poor’s (S&P) 500 snapped its four day losing streak on Friday and managed to gain slight ground, albeit the total return for the week remained in negative territory. The MSCI World Equity Index closed the week lower by approximately 1% and was partially affected by the volatility of the U.S. dollar during the week. Other factors that may have influenced domestic and global equity markets may have been tied to retail sales, which the Commerce Department reported weaker than expected in the U.S. The data caused the Atlanta Federal Reserve’s gross domestic product (GDP) growth estimate to drop to 1.8% for the first quarter of 2018, a figure that stands below the current consensus and is below the fourth quarter growth rate of 2017.
Investment advice offered through Credent Wealth Management, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.