Today is the day and tomorrow I won’t worry about
US stocks finished the week lower for the third week in a row as the Federal Reserve’s preferred inflation gauge showed the central bank’s battle with rising prices is not yet over. Prompting the latest selloff was the core personal consumption expenditures price index, which rose 4.7% year over year in January. Economists had forecast an increase of 4.3%. The core PCE increased 0.6% from December. US treasuries followed stocks lower but not to quite the same degree, and over the month, the 2-month 10-year curve has steepened modestly. Speculation that the Fed will now move for 50 basis points rise at next month’s meeting is gathering pace. Five-year forward inflation expectations have risen recently but encouragingly remain closely pegged to the Fed’s 2% target.
Equity sentiment has been improving as economic reports have offered some hope the economic outlook is brighter. The Citi economic surprise index, which measures economic reports against expectations, recently reached a six-month high. There seems to be a mixed picture coming from the retail investor. According to the AAII retail investor survey, retail investors remain very bearish; however, according to a Bloomberg report retail investors have been piling in. The correlation between stocks and the US dollar remains. The dollar basket has risen in the past month as stocks have fallen.
The focus between the relative values, in particular of US stocks compared to US treasuries, is becoming the focus for investors, as measured by the equity risk premium. If the lack of risk premium for US equities does produce a concerted sell-off in US equities, these occasions could well provide pain in the short term but would reset valuations for US equities, improving the outlook for returns in the following years. As we pointed out before, falling stock markets, by their very own nature, are deflationary. On a more positive note, UK equities look far better in value using the same measure.
The coming week sees the final PMIs from around the globe; the flash numbers did come in ahead of expectations. For the US durable goods orders, pending home sales, the goods trade balance will draw some attention. It will be a busy week in Europe, with key reports on inflation and employment will be released for the Eurozone, Germany, France, Italy and Spain. The annual inflation rate in the Euro Area is expected to fall to a nine-month low of 8.2% in February, and the jobless rate is steady at 6.6%. Investors will also keep an eye on comments from BoE Governor Bailey and Chief Economist Pill.