It was a very dull week for markets after U.S. stocks have moved up by 7% or so since Election Day. Now everyone is waiting for results, patiently, for now.
U.S. equity markets were down about 0.1% on the week, while emerging markets and European markets were down 0.3% and 0.7%, respectively. Yields on the 10-year U.S. Treasury bond moved slightly higher from 2.43% to 2.51%.
Short-term housing data looked slightly better, though the pain of a slowing market for apartments is finally becoming more visible, and longer-term data is no longer accelerating. China matched its annual 6.7% growth rate target, but it took a bunch of stimulus to get it to even that relatively low number.
Headline Inflation Closing In on Core Inflation Rate and Wage Growth
The market seemed to take in stride the 0.3% increase in the month-to-month headline inflation growth rate and 0.2% increase in prices, excluding food and energy. Indeed, this did equal the consensus forecast.
However, we favor looking at year-over-year, averaged data, which shows a much less benign picture. For almost two years, headline inflation has run well below core inflation and hourly wage growth. That has been very beneficial for the consumer, who has been driving almost all of the economic growth in the U.S. recently. It is no coincidence that retail sales growth rates peaked early in 2015, about the same time the gap between inflation was at its widest level.
Unfortunately, the gap between headline and core inflation has closed considerably. The Fed could safely ignore inflation when the headline number was so far below core. Consumers think in terms of headline inflation, not core--you can't eat or drive with core inflation rates. The food and energy components amount to over 20% of spending. It doesn't make economic sense to ignore these components when predicting consumer behavior and recessions. That is why we pay very close attention to the red line above. Note that headline inflation has basically gone from zero to 1.8% over the last two years. Hourly wages growth has accelerated, too, but only from 2% to 2.7%, hardly putting the consumer in a better position, as many have suggested.