“Tumbling oil prices have dragged US inflation into negative territory (alt) for the first time since 2009 — but excluding the influence of energy there are signs of steadier price growth. The consumer price index fell 0.1 per cent on an annual basis in January,” however core inflation “showed an annual gain of 1.6 per cent…unchanged from the prior month.” Furthermore, “a mix of falling inflation and rising wages last month gave Americans their biggest real raise in more than six years. Inflation-adjusted hourly earnings jumped a seasonally adjusted 1.2% in January, the largest monthly gain since December 2008.” Meanwhile, consumer confidence and sentiment indices don’t seem to agree with the pundits about the distress of the middle class. Here’s the bottom line: “If the extra disposable income [from cheaper gasoline] finds its way into higher discretionary spending it could prove a boost to inflation in the months ahead.” So…why isn’t the Fed worried about collapsing breakevens (inflation expectations)? For one thing, these expectations are built from security prices indexed to headline inflation. But here’s Janet Yellen to explain why she ain’t scared: “We refer to this…as ‘inflation compensation’ rather than ‘inflation expectations’…The risk premium that’s necessary to compensate for inflation, that might especially have fallen if probabilities attached to very high inflation have come down.” In other words, if the Weimar routine stops convincing people, then the risk premium embedded in inflation-indexed securities should drop. They’re sticking to this idea in the latest Monetary Policy Report: “information gleaned from 10-year inflation options…suggests that investors may have recently become more concerned about lower inflation outcomes and less concerned about higher inflation outcomes. This shift could reflect an increase in the investors’ perceived likelihood of low inflation outcomes, but it could also reflect an increased willingness to pay higher premiums for insurance against such outcomes as well as other possible factors.”
Today’s Highs Are Tomorrow’s Middle
“Stocks might be overbought, but momentum remains on their side.” Pause. Breathe. “Another consolidation is due, but timing is difficult [to predict]…Overbought indicators can stay overbought and the market can continue to grind higher.” Meanwhile, Cullen Roche says “there’s a strong tendency in the financial markets to live in the extremes…But like most things in life, the best place to be is often somewhere in the middle. Living on the extremes results in extreme and oftentimes irrational outcomes.” Furthermore, “there’s great drama to be mined with breathless analysts telling us that the lastest data point from 20 minutes ago is a game-changer…Unfortunately, it’s never really clear what stress points will be crucial the next time, or when. The next best thing is keeping an eye on a proxy that draws on a broad set of cyclical signals…That’s a yawn if you’re looking for snappy headlines, but it’s the only solution if you’re trying to minimize the potential for surprises in the art/science of business-cycle analysis.”
The story about companies offshoring from China seems to be building an audience…stay tuned.
What: This ATM Is Ruthless