The post-Election Day exuberance among investors is obvious to even the most tangential of financial market watchers. But is it warranted?
#Economy #Confidence #TrumpTrain
Before we answer that question, consider the facts (in our Trump Tracker, via the Early Look's Chart of the Day). Since Election Day, Wall Street has ratcheted up U.S. economic growth expectations. In just three months, GDP estimates for the first quarter of 2017 have risen 2 basis points to 2.3%. Consumer price inflation expectations for year-end 2017 are up 2 basis points too, to 2.2%.
Measures of consumer and small business confidence have spiked dramatically since Trump's election. Many have hit post-financial crisis highs. Here are the latest results compared to pre-election October readings:
Investors, consumers and small businesses alike are clearly on the Trump Train.
#GrowthAccelerating #Commodities #SmallCaps
Then there's the post-Election Day market moves:
The common thread running through financial markets is U.S. growth expectations are rising.
#GDP #Inflation #IndustrialRecession
We asked recently, "Are You Bullish Enough?" and added these facts to the mix:
Sure, the stock market bears can argue that complacency has set in. Since Election Day, the VIX, a stock market volatility index, is down almost -40% to a reading of 11.43. (Volatility rises when investors are fearful of the future.) Typically, when the VIX falls this low (below 12) it snaps up. Investors book gains. Stocks fall.
But as we wrote yesterday, stock market volume has been rising on days when stocks are up and falls on down days. This confirms conviction in the market moves. Investors are buying each rally and not selling the dip.
The key takeaway is simple. All of this suggests investors stay invested in the stock market.
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The U.S. Energy Information Administration on Wednesday reported crude-oil inventories climbed by 13.8 million for the week ended Feb. 3. Oil prices rose on the day, a move confounding many who thought the increase would send prices lower.
No need to be confused.
"The market as a whole is focused on the OPEC deal," says Hedgeye Senior Energy Policy analyst Joe McMonigle. Secondary OPEC sources say the deal to cut the 14-member country's oil production, from 33.8 million barrels a day to 32.5 million barrels a day, has been 90% compliant.
"I'm still a skeptic on that point," McMonigle says.
The more important thing to watch, he says, is how higher oil prices (up 11% in the past three months) are affecting U.S. shale production, McMonigle says.
Active U.S. rig counts rose from 729 versus 571 a year ago. "The U.S. shale producers are really responding to the higher oil prices as a result of the OPEC deal," McMonigle says.
Click here to watch McMonigle's entire interview on BNN.
For years, Fed watchers have been getting antsy as unemployment falls toward NAIRU — the Fed’s estimate of the bound below which inflation rises. But as shown in the graphic above, each time unemployment has threatened to break through NAIRU the Fed has lowered NAIRU rather than raise interest rates. Why?
The answer would appear to be in wage growth. As shown in the small inset graph, there is a strong relationship between wage growth and slack in the labor market—as measured by the difference between unemployment and the Fed’s NAIRU estimate. What this suggests is that the Fed has consistently overestimated wage growth, leading it to lower NAIRU when new wage data come out.
As the yellow highlighted part of the graphic shows, we appear to be at a turning point. Unemployment is now near the bottom of the Fed’s NAIRU range. This supports the case for Fed rate hikes.
But beware. Though the Atlanta Fed measure of wage growth remains strong, at around 3.5 percent, it is slowing. Should it fall to 2.5 percent, we can, on past experience, expect the Fed to lower NAIRU again, such that its measure of labor market slack rises from zero to as much as 0.8 percentage points. That would mean putting rate hikes on hold.
This is a Hedgeye Guest Contributor piece written by Benn Steil and Emma Smith and reposted from the Council on Foreign Relations’ Geo-Graphics blog. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. It does not necessarily reflect the opinion of Hedgeye.
Stock market volatility has been absolutely smashed. That's bullish for stocks.