18 May A MIXED DAY
Equities were mixed. Technology was modestly lower while the industrials modestly higher. The inflation debate is front and center. In my view this is one of the few times the Fed needs to be absolute correct in its outlook that today’s increase is indeed transitory. Based upon current policy and statements, any outcome outside the projected range may have significant ramifications.
Many times, I have commented about inflationary expectations. Inflation has been essentially absent for the last 15 years and some financial assets are priced to reflect as such.
Yesterday I referenced the University of Michigan Consumer Sentiment Survey which is indicating inflationary expectations are now at a two-decade high. I must write this data can be distorted if viewed on a short-term basis, the magnitude of the increase in these expectations is concerning given that prices are coming off a low level.
The risk is that as inflation expectations rise, they become imbedded in consumer and business decisions. Workers demand higher wages to keep up with prices no matter the underlying productivity; businesses pay to keep those workers and then raise prices to compensate. Workers then demand high wags as expectations are hard to break.
If businesses and consumers are focused on what they are paying for food or energy or for services versus the technical nuances as to how these indices are comprised, expectations in the Fed’s ability to control prices will decline.
What will happen today?
Last night the foreign markets were up. London was up 0.47%, Paris up 0.22% and Frankfurt up 0.29%. China was up 0.32%, Japan up 2.09% and Hang Seng up 1.42%.
The Dow should open nominally higher on economic optimism. Oil is up and the dollar is at a four-month low. The 10-year is up 2/32 to yield 1.65%.