The political media is continuing to invade the financial media. Yesterday, the big headline was that Facebook, Inc. (FB) is being investigated for selling data during the 2016 Presidential election. As a result, FB went down–and it dragged the rest of the market with it. This morning, however, the Dow is off to a strong start. That means this recent “washing machine” market continues, but that won’t always be the case. In today’s blog, we’ll take a look at what I foresee going forward.
Last week, the Labor Department released both its Consumer Price Index (CPI) and Producer Price Index (PPI) data from February. In the previous month, the CPI rose 0.2%, which was in line with economists’ estimates. Excluding the volatile food and energy, core CPI increased 0.2%. Interestingly, inflation-adjusted hourly wages were flat in February and are only up 0.4% in the past 12 months. Overall, CPI is up 2.2% and core CPI rose 1.8% in the past 12 months.
During February, the PPI also increased 0.2%, slightly higher than economists’ estimate for 0.1%. Excluding food and trade, core CPI jumped 0.4% last month, due mainly to a 0.3% rise in services. In the past 12 months, PPI is up 2.7%, while core PPI increased 2.8%. Clearly, we’re seeing an increase in wholesale inflation, but wholesale food prices were actually down for the third-straight month and wholesale gasoline prices dropped 1.6%. So with a few major PPI components down in February, I expect wholesale inflation fears to subside.
The Commerce Department also reported last week that retail sales dipped 0.1% in February, which marked the third-straight monthly decline. This was a big surprise, as economists were looking for a 0.4% increase. I think that the Commerce Department may be underestimating online sales, but this was clearly a weaker-than-expected report last week.
Couple disappointing retail sales with a deceleration in both existing and new home sales, and it’s easy to see why first-quarter GDP estimates are falling. The Atlanta Fed previously estimates first-quarter GDP of 5.4% back in January. But now the Atlanta Fed is only looking for 1.9% annual GDP in the first quarter.
Due to the sudden deceleration in the Fed’s GDP forecasts, as well as moderating inflation reports, the March Federal Open Market Committee (FOMC) statement tomorrow is almost guaranteed to be “dovish.” And as we’ve discussed before, a dovish Fed statement this week will serve as a launching pad for the stock market.
In addition, first-quarter window dressing and the 90-day realignment of smart Beta and equally weighted ETFs will be getting underway in the upcoming days. Overall, I expect a strong finish for the stock market in the last several trading days of March.