Until yesterday, 5/11/17, it’s been a quiet week for stocks and bonds. And I mean shhhh…you’re in a library quiet!
A measure of stock volatility in the broad S&P 500 equity index is the VIX, which trades on the Chicago Options Exchange. In the first quarter of this year, the VIX was at its lowest level since 1995, observed Lance Gaitlan at Dent Research.
Market bulls think this signals a move higher in stocks, but bears think the markets are disregarding risks and traders are too complacent.
Yesterday’s mini selloff may be a warning, but we’ll see what happens in the weeks to come.
Thanks to Dent Research, provided here is our weekly information roundup ending the week of May 12, 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.
Consumer Prices Inched up 0.2% in April, and Rose 2.2% For the Year… Core prices, less food and energy, moved up 0.1% last month and are 1.9% higher than this time last year.
What it means – Inflation hawks aren’t going to like this. Without rising prices, the Fed has less reason to raise short-term interest rates, which puts the June rate hike in question. Given that Fed officials have repeated their “data-driven” mantra ad nauseam, this data point could be the one that flips the Open Market Committee from “hike on,” to “hike off!” We’ll spend the next month debating the issue, right up until the Fed releases its rate decision. And then we’ll start worrying about September.
In the meantime, it’s worth noting that while the Fed might or might not raise short-term rates, long-term rates remain stuck at 3%, indicating little faith in economic growth rising much above 2% for years to come.
Retail Sales Expanded 0.4% in April, Missing Expectations of 0.6%… After retail sales disappointed in March, investors expected a strong rebound in April, but it didn’t happen.
What it means – Based on consumer confidence, investors desperately want consumer spending to expand quickly, but they aren’t getting their wish. Categories like electronics and appliances had a good month, but buyers aren’t shelling out more for basic goods. Auto sales bounced a bit, but that followed three months of dismal numbers.
This is one more number that points to mediocre growth, which should hold down GDP in the months ahead.
Oil Inventory Down 5.2 Million Barrels, Marking Five Consecutive Weekly Declines… Inventory now stands 2.8% higher than a year ago. Oil prices jumped on the news.
What it means – It used to be that when oil inventory rose above 450 million barrels, markets considered it a glut. Now, when inventory falls from 527 million to 522 million, the price of oil climbs. In spite of the modest declines, has anyone noticed we still have more than half a billion barrels of oil in storage? And then there’s the issue of the OPEC production cuts and uptick of U.S. shale activity.
OPEC recently released its estimate of non-OPEC production. The group has consistently raised its 2017 forecast which started at a modest 250,000 extra barrels of oil per day. Now the group expects those outside the cartel to add 950,000 more barrels per day to the market this year. Most of it, 820,000 barrels, are from U.S. fracking.
This goes a long way to explain why the Saudi-led production cuts, originally set to expire this month, will most likely run through at least November. Even then, I don’t expect the cuts to work. Most OPEC and participating non-OPEC members don’t keep to their production limits, and higher prices – the goal of the cuts – benefit U.S. shale producers.
For OPEC, this is a lose-lose proposition. Expect oil to remain low.
2018 Marketplace Insurance Premiums on the Rise… Insurance company rate requests for next year are trickling in, and so far the premium hikes range from 15% to 50%.
What it means – The higher numbers are no surprise, even on top of last year’s average 25% spike. We only have a few pieces of data so far, but I expect we’ll see an average increase of 17% to 20%. So, in less than two years, the typical insurance premium will have moved up 50%. Talk about inflation!
The problem remains the same, and it’s built into the existing Affordable Care Act (ACA). By covering everyone, including pre-existing conditions, with a cap on how much insurance companies can charge older consumers compared to younger consumers, the cost of insurance would inevitably spiral out of sight.
There are ways to bring down the costs, by requiring responsible behavior and streamlining service through clinics, but everything has a trade-off. The biggest issue is that the ACA cemented a new entitlement, and such things are very hard, if not impossible, to undue, and typically get more expensive over time.
Japanese Real Wages Fell 0.8% in March over Last Year… Even with a cheaper yen, Japanese workers can’t seem to make any headway.
What it means – The stated goal for crushing the yen was to drive up domestic profits, allowing Japanese companies to pay higher local wages, which would stoke consumption and inflation. It didn’t work.
As the Bank of Japan pushed the yen from 75 per dollar to 125 per dollar, there’s no doubt that Japanese companies selling internationally earned higher profits, but they were stingy about sharing their new wealth with workers. However, when the yen gained a bit of ground, moving back up to 114 per U.S. dollar, those same companies took a hit (Toyota just reported a 20% earnings drop), and squeezed their workers accordingly. If it sounds like a one-way street, that’s because it is.
Anyone hoping for a near-term bounce in the Japanese economy will be sorely disappointed. I still expect the yen to move lower… a lot lower!
Senators Corker and Coons Propose Food For Peace Reform Act... The bill will eliminate the requirement that U.S. food aid be domestically grown and transported on U.S. ships.
What it means – Finally! This is one of those regulations that, if you squint, you can kind of see how it made a little bit of sense when it was passed, but in practice, it’s idiotic.
Today, we require food aid, no matter where it’s sent, to be grown in the U.S. and transported on U.S. flagged vessels. Imagine sending food to central Africa. To reach starving people, we must ship food from the U.S. to the African coast, and then transport it inland. As the train cars roll through the African plains, they pass miles of locally grown crops. When our aid arrives, it not only costs ridiculously more than simply buying from area farms, but it also drives down local production because we give the food away. So in one fell swoop, we currently make our aid ridiculously more expensive to provide, and kill the local markets in which we operate. Brilliant!
I applaud Senators Corker and Coons for addressing the issue, but I have one question. What took so long?
By eliminating these regulations, the senators estimate we can provide an additional $500 million in food aid, which is sorely needed in war-torn parts of the world.
Next Week – The third week of May brings reports on housing starts and industrial production.
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