Year begins on a stronger note

Week ending Friday January 12 2018

The damned stock market just won’t stop rising. The yield curve is getting steeper too, and shifting higher, at least that was what happened this week. Markets continue to move in directions that imply an enduring increase in nominal growth.

5-year Inflation indexed bond spreads imply about 1.9% average yearly inflation over the next five years, about the same as the week before, but up from about 1.7% in early December. The dollar continues to plunge, with the “DXY” spot dollar index down 1.7% just this week. It’s not that the dollar is at a particularly low valuation, it’s still 12% above the 2014 “pre oil glut” days, but it is at a three-year low. While the dollar is at a three-year low, West Texas Intermediate is at a three-year high, rising 4.7% week-over-week to close Friday at $64.30. The higher oil price seemed to be in response to weaker oil inventories, and it should lead to substantial incremental oil production in the US.

Stocks, yields, foreign exchange, inflation spreads and oil all helped nudge up the general market outlook last week.


It was a light week for data; we got Wholesale Trade, trade prices and the Advanced Retail Sales. We also got the CPI report, but no one really cares about that anymore, it’s all about PCE inflation in the Personal Income report, which comes out on the 29th.

Wholesale trade showed sales of both Durable and Nondurable goods up impressively year-over-year, and monthly growth was impressive, too. The BLS Import and Export Price Indexes release showed the effects of the weakening dollar, as imports were 0.1% dearer and exports 0.1% cheaper in December 2017. Retail Sales was the big statistical item this week, it didn’t grow all that much, month over month, but still built on the enormous gains of November and September, up 5.6% year-over-year ex “food service sales”, after last month’s read, the highest since 2012.

NGDP Outlook

We’ve shifted our gaze on the “NGDP expectations curve” and are now looking at NGDP for 2019 Q1. We’ve got the forecast tracking a little over 4.1% in the first two weeks now, drifting upward with markets. We think 4.1% is too low, and expect the number to move higher when GDP is released on January 26th. In addition to the strong economic data, currency markets in particular seem “down on the dollar”, perhaps they are getting ahead of the Fed, and anticipating that current acceleration in US economic activity will also stoke import demand, weakening the dollar. The 5-year yield has been marching higher too, now at the highest point since 2010, indicating a faster pace of rate hikes.

Looking Ahead

The week of Friday January 19 will see a number of regional Fed surveys, though the important data points will come in the Industrial Production report. Given the other December data this report should be strong. There is also New Residential construction, which could be interesting. We are particularly eager to see where “crypto” prices go. Bitcoin has been volatile, mostly between $13,000 and $16,000 over the past few weeks. The market seems to be awaiting implementation of new payment systems for Bitcoin. Ethereum has gained on Bitcoin, rising to about $1,400 as of now, with a market value about half that of Bitcoin’s.

Luckily, we won’t have to distract ourselves with crypto currencies for too much longer, with the much anticipated Q4 GDP estimate coming at the end of the month.


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