12 Oct HAS INFLATIONARY EXPECTATIONS CHANGED?
Stocks fell over concerns about faster inflation, lackluster earnings, and rising US dollar.
Commenting about inflation, are inflationary expectations beginning to rise, the result of climbing oil prices? As penned many times inflation has two components; monetary and psychological. Inflationary expectations have continued to diminish over the last five years and such is a major variable for monetary policy.
Briefly speaking, inflation is defined as too much money (monetary) chasing too few goods fearing (psychological) higher prices tomorrow.
As rhetorically asked, are inflationary expectations beginning to rise as oil is at a 15 month high, partially the result of shrinking inventories and a potential cut in production? If expectations are rising, sovereign debt would be crushed given current yields. Few have discounted the possibility of such, an environment that will be amplified given the lack of regulatory induced illiquidity and cross correlated technology based trading.
As widely known, equity markets are extremely sensitive to any real or perceived changes in monetary policy. Any hints of higher rates send equities lower.
And then there are earnings and the dollar. Higher rates theoretically dictates a higher dollar and lower earnings given the multipolarity of trade.
Speaking of earnings, equities were also spooked by a disappointing profit report from Alcoa. Analysts are expecting a 2.5% decline in quarterly results, its sixth consecutive decline. I am expecting earnings will again exceed expectations for the gazillioneth quarter under the simple guise of under promising and over delivering, but I think unless earnings growth turns positive, equities will mark time at best.
What will happen today? The Minutes from the September Fed meeting is released. How will this release affect market psychology?
Last night the foreign markets were down. London was down 0.09%, Paris down 0.12% and Frankfurt down 0.12%. China was down 0.22%, Japan down 1.09% and Hang Sang down 0.60%.
The Dow should open little changed before the Fed Minutes. Pundits have already declared this is one of the worst starts to earnings season in over 7 years. I ask how are such assessments made given only one company has posted results?? Is this hyperbole with attribution based upon how many times the story is clicked upon?
The 10-year is off 6/32 to yield 1.79%. Oil is nominally higher.