The “reflation” trade has dominated headlines as of late. Headlines, however, do not create profits. Is there substance to the economic tailwind currently in place?
US Data
ISM Manufacturing PMI came in at a strong 57.7 (over 50 indicates expansionary). Conference Board Consumer Confidence came in at 114.8, the highest level in 15 years[1]. Durable goods orders were up 1.8% in January. This is a good sign that capital expenditures by corporations are on the rise. Home prices increased 5.6% year over year in December according to the Case/Schiller HPI Comp – 20 Index[2]. This is an indication that price appreciation has weathered rate hikes and potential buyer draw downs.
President Trump addressed Congress and much of his speech resonated with investors prompting market records on Wednesday. The Dow Jones closed above 21,000 for the first-time Wednesday. The 20,000-mark brought much attention, but 21,000 came with little to no fan fair.
The Federal Reserve Board (FRB) is likely to raise rates this month based on recent speeches. As discussed in a previous article, the FRB would have board governors speaking to the press in support of a hike. That is exactly what happened this last week as Chair Yellen, NY Fed President Dudley, and Vice Chair Fischer were all out in support of a hike.
International Data
EU Business Activity grew at its strongest pace in the last 6 years. Headline inflation for the Eurozone came in at 2% (meeting the ECB mandate for the first time in 4 years[3]).
The United Kingdom has suffered a setback in their plans to activate Article 50 this month. Article 50 sets Brexit into motion, however, the House of Lords has proposed an amendment that Parliament now has to weigh. The revision will not stop Brexit, only potentially delay the starting point.
Caixin Manufacturing index, a private measure of manufacturing in China, expanded at a rate of 51.7[4]. A good sign just before China’s annual policy setting meeting.
Conclusion
Markets have been moving not only on the Trump “reflation” trade, but on strengthening economic data and indications that corporations are starting to spend money. While these actions are a good indication of economic strength, they cannot stand alone. More economic substance is going to need to come from the fiscal part of the equation as monetary policy begins to tighten. Otherwise, markets will have likely gotten ahead of themselves in recent months.
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[1] www.mfs.com – week in review
[2] www.investing.com – economic calendar
[3] www.troweprice.com – global market wrap up
[4] www.investing.com – economic calendar