Domestic stock prices fared well last week despite a mixed bag of data.  We saw positive PMI, consumer debt, and leading indicator data.  While we saw negative housing data, and inflation that continues to be a non-factor.  Being a non-factor is actually deceiving and we’ll take a look at its two components to explain.

The Good:

On the other hand, Markit’s flash PMI increased at a fever pitch from 53.7 to 56.7 (with 50 marking the difference between expansion and contraction)[2].  Weather has persisted as a major distraction on the viability of many economic reports this winter, it’s tough to tell if this harsh winter will lead to pent up consumer spending in the spring or continued sluggishness in the US economy.

The Bad:

Housing markets provided more indications of softening as existing home sales decreased 5.1% in January[3].  Weak existing home sales this time of year are not abnormal, however steeper than anticipate and quite a bit of it is currently being attributed to harsh weather.

The Non-Existent:

Inflation has stayed benign at a tepid 1.6% year over year.  This can be a major cause for concern looking forward. I would love to see wages increase without prices increasing, but how would corporations pay for those wage increases, if not by increasing prices.  After all we’ll be making more money so of course we’ll want to buy more goods and services, which should drive prices up.

So, why are we not seeing wage increases, high consumption, and inflation?  After all, the most recent recession ended over 5 years ago, 12/2008.  When you consider inflation and what it is actually doing, there are 2 things to look at:

1)      Goods inflation makes up 40% of Consumer Price Index (CPI) and commodity prices tend to be volatile and subject to many variables, supply, demand, and speculation/investment to name a few.  As of late, goods based inflation has stayed fairly subdued. Current goods based CPI came in at a mere 0.3% year over year as of January, a major detractor from overall CPI that stands at just 1.6% year over year.

2)      Services inflation makes up 60% of CPI and is currently running at 2.3% year over year.  The Fed’s goal is to maintain inflation at or about 2%.  So services are running just above the inflation target[4].

So the main culprit of an inflation environment that remains benign is the lack of inflation in the goods market.  Should the Fed do anything to try and stimulate the economy and get inflation going?  In my opinion, no!  Remember goods based inflation is not just driven by our demand and must be handled carefully, increasing stimulus to generate further services inflation to offset goods inflation could cause grave inflation issues if and when goods based inflation comes back around.

Internationally, car sales in Europe grew by 5.2% in January, showing the impact of previously pent up demand.  The UK suffered a setback in their unemployment rate, increasing by 0.1% in January to 7.2%.  Japanese stimulus has yet to materialize into economic development as Q4 GDP came in at 1% annualized.  The HSBC China Manufacturing PMI decreased from 49.5 to 48.3[5].

If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.

Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services.  Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.  Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.