RECORD MARKIT PMI PRICING

Wow!  A broad measure of input pricing—Markit PMIs–rose to an all time high.  Typically, such is associated with either rising consumer prices or falling margins or both in many instances.  The accepted reason is supply chain disruptions, record low inventories and surging demand.

Will these costs be passed onto the consumer, thus increasing inflation?  Or will these costs be absorbed by the producer or wholesaler, which will reduce margins given their inability to further reduce costs?  Either option can increase volatility.

Today is unique as wages are rising about twice the rate of inflation, a major reason as to why demand is accelerating.  I can imagine a scenario where prices rise but such a rise does not impact spending given the mismatch between inflation and wage growth.  However, such will be interpreted negative by both the bond and equity market.

As noted a gazillion times, the primary determinate of equity valuations are interest rates.  Any increase in rates without a decline in costs or an increase in final prices will dictate lower equity valuations, an environment amplified today by near record low interest rates and sky-high valuations.

I am relatively certain the narrative might change to rising rates will impact economic activity.  As written above, wage growth is about twice that of inflation thus hypothetically purchasing power is not being challenged.

Demand pull inflation is the result of today’s environment.  The question at hand will demand pull (product) inflation morph into cost push (wage) inflation?  If this unfolds, a negative feedback loop can develop similar to the one experienced about 42-43 years ago, an environment that few market participants have experienced.

An issue at hand is Congress’s insistence of a $15 federal minimum wage.  The inflationary implications are huge.  The CBO predicts that if such is passed approximately 1.4 million jobs will be lost and inflation may rise to 4.0%.

Wow!  If Economics 101 is still of any relevance, financial market volatility will rise.

Commenting on Friday’s market activity, the yield curve continued to steepen with both the 10- and 30-year Treasury yields both at post COVID highs and the yield curve the steepest in over 8 years.  Equities were relatively unchanged.

The economic calendar is comprised of several sentiment indicators, inventory statistics, personal spending and income data and a revision in 4Q20 GDP.  Will the information reinforce the growing reflationary narrative?

Last night the foreign markets were down.  London was down 0.55%, Paris down 0.43% and Frankfurt down 0.48%.  China was down 1.45%, Japan up 0.46% and Hang Seng down 1.06%.

The Dow should open about 0.50% lower and the NASDAQ about 2% lower as the yield curve is continuing to steepen.  An issue at hand is the “long bond” is continuing to sell off even as the Fed indicated that it will not stop asset purchases.  The FOMC made it abundantly clear it will indicate to the market when asset purchases will end to avoid a repeat of the “taper tantrum” of 2013 when the 30-year surged over 120 basis points in quick order.  What is this suggesting?

The 10-year is off 6/32 to yield 1.36%.  Oil is up about 1% as Goldman is forecasting $70 oil in the “coming months.”

 

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.