The markets continue to run hot despite some news that might be considered a headwind. Inflation and higher rates are what may come to mind but these two can work quite well as markets grind higher. The underlying area of concern in an economy experiencing inflation is the ability to pay for it, in stride, without losing momentum. Unemployment coming in higher than expected is not a great factor at the moment. That can and most likely will be corrected. Banks and financial institutions can benefit as well from higher rates as loans produce better income. The loans have to be written though for this to happen, and that means the applicant is willing to take on risk. That applicant looks at either the payment or the rate and makes a decision that assumes confidence in the future to go ahead with the loan. Whatever the situation, be it a large institution, or a first time car buyer, they both go through the steps of looking ahead and determining whether or not they can maintain their current liabilities and take on new liabilities at the same time.
However, the banks also have to believe the applicant is credit worthy. That is really the issue since most individuals and companies are typically more optimistic than banks. With unemployment consolidating or even getting worse we might see a tightening of lending criteria from the banks. If you listen to some of the bank earnings calls and notes, you’d notice that businesses are not drawing on their lines of credit to the full extent and loan growth at consumer banks is off as much as 9% from last year. Not a huge deal, but that might mean that consumers are flush with cash, as the stimulus and the potential savings from staying at home/work from home lifestyle added up to higher savings rates.
The inflation factor is now getting very real in the supermarket. Prices of beef, chicken and other meat products are all up. Corn is up over 140% in the last 12 months. There is a drought in Brazil which caused a bit of price momentum as well as higher demand from China.
India is a large exporter of sugar which is also on the rise. With the recent outbreak in that country, shipping vessels are reluctant to dock there for the fear of a quarantine after they leave. So now we see sugar demand still high with less supply, so prices move up on that commodity as well. Prices are up about 17% in the last month.
In housing, lumber continues higher as well. The amount of lumber required to build a home has doubled in price in the last 8 months. Buying an existing home is no bargain either, as houses continue to be bid higher after they list on the market.
Iron ore is red hot as well and the futures on the commodity jumped 10% in minutes this morning, according to an article on Bloomberg. Steel and metal stocks continue to be a focus.
These are some of the push and pull factors that the markets are digesting as they continue to climb the wall of worry.
Market Commentary / Looking Ahead
Equities finished higher Friday with Dow, S&P setting new record closes. Major indices were generally higher for the week though Nasdaq declined. We saw the momentum names outperformed the value names on Friday after lagging for a bit during the week. All sectors except consumer staples were higher with energy, the best performer and a big WTD gainer. Industrials and tech were among the other outperformers. Financials saw some drag from banks. Treasuries were mixed with the curve steepening. Dollar weakened on the major crosses. Gold finished up 0.9%. Oil was stronger, with WTI settling up 0.3% and capping its second week of solid gains.
The Calendar is mixed this week with Wednesday Thursday and Friday carrying the most significance:
- Nothing material to list here
- 08:55 US Redbook YoY, Redbook MoM
- 10:00 US JOLTS Job Openings
- 10:30 Fed’s Williams Speaks
- 12:00 Fed’s Brainard Speaks
- 13:00 Fed’s Daly Speaks
- 08:30 US CPI YOY and MoM
- 08:30 US Core CPI Yoy and MoM
- 09:00 Fed’s Harker Speaks
- 09:00 Fed’s Clarida Speaks
- 10:30 US EIA Gasoline Inventories, EIA Distillate Inventories, EIA Crude Oil Inventories
- 13:00 Fed’s Bostic Speaks
- 13:00 US 10-Year Note Auction
- 14:00 US Federal Budget Balance
- 08:30 US Initial Jobless Claims and Continued Jobless Claims
- 10:30 US EIA Natural Gas Ch. BCF
- 08:30 US Retail Sales MoM and YoY, Core Retail Sales MoM and Yoy
- 08:30 US Import Prices MoM
- 08:30 Canadian Wholesale Sales MoM
- 08:30 Canadian Manufacturing Sales MoM
- 08:30 US Export Prices MoM
- 09:15 US Industrial Production MoM
- 09:15 US Capacity Utilization
- 09:15 US Manufacturing Output MoM
- 10:00 Unv. Michigan Sentiment Prelim, Expectations Prelim, Condition Prelim, 5 Yr Inflation Prelim, 1 Yr Inflation Prelim
- 13:00 Fed’s Kaplan Speaks
S&P futures little changed in Monday morning trading after US equities finished mostly higher last week with upside leadership from commodity equities, financials and industrials. Growth and momentum underperformed on the week but were higher Friday. Asian markets were mostly higher overnight with Japan one of the better performers while Hong Kong ended slightly lower. European markets mixed. Treasuries are mostly weaker though 10-year yields holding below 1.60%. Dollar firmer vs yen and euro but under some pressure vs sterling. Gold up 0.3%. WTI crude up 0.5%.