Stocks continued their journey higher while rates also moved up this past week. President Trump again helped stocks move to new record closes earlier in the week by tweeting his “stupendous” tax plan is imminent.
Fed Chair Janet Yellen endured a couple days of grilling (but mostly political grandstanding) during Senate and House testimony. The important tidbit of insight came when Yellen basically said that the data is supporting a rate hike sooner than later. The markets aren’t disregarding what she said but still seem to value the safety of the Treasury market despite the stratospheric, record-breaking stock market. It’s good to participate in the gains, but it may be even better to prepare in advance for the declines.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of February 17, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
Retail Sales Up 0.4% in January, and Up 0.8% Excluding Autos… The growth exceeded expectations of 0.1% overall and 0.5% excluding autos.
What it means – The unexpected gains come with an upward revision to December’s numbers. After a tepid holiday season, consumers are now spending with gusto, across all categories except autos, where sales dipped a bit. The annual pace topped 5%, the best level since 2011. These are great numbers, but retail sales are notoriously volatile. We’ll have to see if this continues for a couple more months before calling it a new trend.
U.S. Producer Prices Up 0.6% in January, Up 1.6% Over Last Year... Excluding food and energy, producer prices jumped 0.4% last month, and are up 1.2% over last year.
What it means – Prices rose across most categories, but the big driver was energy. Not only do we pay more for gas and heating oil, but we also pay more to have goods created and shipped because both of those activities take energy. Remember a zillion years ago, when it was January 2016 and oil dropped to the mid-$20s? Well, now oil prices sit in the mid-$50s, so the year-over-year comparison shows a big jump. After this period of readjustment, where we see the higher price of oil work through the economy over the next several months, I think inflation fades and takes interest rates with it.
Consumer Prices Up 0.6% in January, and Up 2.5% over Last Year… Inflation jumped much more than expected last month and the annual figure sits comfortably above the Fed’s 2% target.
What it means – Excluding food and energy, prices climbed 0.3% in January, and stand 2.3% higher than this time last year. But just as with producer prices, the cost of energy adds to most everything included in consumer prices, so we’re still dealing with the same thing. The most notable part of the CPI report was that real wages fell 0.6% for the year, so consumers are going backward in their standard of living. That’s not a sustainable situation.
Fed Chair Yellen Suggests Rate Hikes Coming in Near Future… In her congressional testimony, Yellen said it would be a mistake to hold rates exceptionally low in the face of continued growth.
What it means – A quick review of the inflation figures above, both for consumers and producers, explains Yellen’s statements. She doesn’t want to be caught in a game of catch-up, where she has to raise rates at every meeting as prices climb. Her worry is understandable, but I think it’s overstated. As I pointed out earlier, the cost of energy flows through most everything, so as we work the rising price of oil through the economy, prices go up. This is much different than demand-driven inflation, where more consumers are bidding for goods and services. We still don’t have wage inflation. In a few short months the inflationary pressure should ease.
Housing Starts Drop 2.6%, But Still Beat Expectations… Permits jumped, driven higher by multi-family starts.
What it means – December housing starts were revised up by 53,000 to 1.279 million. January housing starts were expected at 1.232 million, and came in a bit better at 1.246 million. Still, this was 33,000 shy of the revised December number. If you stayed focused for all that math, great, but the end result is a big yawn. Even though we had unseasonably warm weather across much of the country in January, housing starts didn’t shoot to the moon, so I don’t expect a big jump in completions, and therefore new home sales, in the months ahead.
Eurozone GDP Rose 1.7% in 2016… That’s a bit lower than expected, reflecting slower growth in Germany and Italy.
What it means – At least those two countries posted positive numbers. Greece is still going backward. Overall, Eurozone GDP has been stuck between 1% and 2% for years, and it doesn’t look like it will break out to the upside anytime soon. With another round of Grexit fever coming in July, along with national votes in France and Germany, things could get very tense on the Continent. If the French, Italians, or Greeks make a concerted effort to leave the common currency, it could drive the entire region lower as they sort out the details.
Burger King Put Adult Toys in Adult Meal Boxes for Valentine’s Day… The promotion was only available in Israel, from 6 p.m. to closing.
What it means – When it reads “adult toys,” you can substitute “sex toys,” although the offerings were restricted to things like blindfolds and feather dusters. The meal box also included two burgers, two orders of fries, and two beers. Any discussion of this episode should start with the big question of “Why?!” Not, “Why did they do this?” but “Why was anyone at Burger King for Valentine’s Day?” After that topic, whatever they put in the box really doesn’t matter.
Next Week – The week of February 20 starts with the markets closed for President’s Day. After that, we get reports on existing and new home sales, along with the minutes of the Fed’s January meeting.
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