Key economic data (U.S. retail sales and inflation) reported yesterday confirms what we've been saying here at Hedgeye for some time now... U.S. growth and inflation are accelerating. Year-over-year growth in both data sets are near or above 5-year highs.
Okay. Obvious statement of the day: Growth and inflation accelerating is bullish for the U.S. stock market.
The epic Trump trade -- one which has propelled U.S. stocks to record highs across all three major indices -- continues.
1. Retail Sales
The year-over-year growth rate in retail sales hit 5.6% yesterday, a level not seen since March 2012. Digging deeper into the report, the retail sales “control group” (a good proxy for the input into the consumption component of US GDP) accelerated to +4.0% year-over-year growth for the month of January versus +3.4% growth in December.
2. Consumer Price Inflation
Core inflation just hit the highest level in 5 years. CPI accelerated to +2.5% year-over-year in January versus +2.1% in December. Inflation has now accelerated for the 6th consecutive month.
the Fed Is Falling Behind
Fed head Janet Yellen said yesterday that the U.S. economy was "very close to achieving" objectives of maximizing employment and maintaining a stable inflation rate of 2% (the Fed's inflation target).
For some time now, we've been arguing that the Fed risks falling behind the curve if they don't raise rates (and soon). Our proprietary leading indicator on inflation suggests year-over-year CPI readings could hit three, even four, percent in the first quarter of 2017, as previously beleaguered commodity prices contribute to inflation growth in the coming months.
This would shock Yellen & Co. An inflation rate at or above 4% hasn't been seen since September of 2008. In other words, we may need more rate hikes than the two or three currently expected by the market in 2017.
Both retail sales and inflation suggest the U.S. economy is heating up. That's bullish for the stock market. And watch the Fed. They're already falling behind the curve on this growth and inflation data.