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.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.