Supply, Demand, & Prices
The following headlines have been reprinted from The Penn Wealth Report and are protected under copyright. Members can access the full stories by selecting the respective issue link. Once logged in, you will have access to all subsequent articles.
Inflation came in muted, and the markets love it
(13 Mar 2018) US consumer prices did rise in February, but less than in the prior month, and in the sweet spot from an inflationary standpoint. The consumer price index (CPI) rose 0.2% in February, following a 0.5% jump in January—remember how that spooked the markets? Excluding the two wildcards, food and energy, the numbers were precisely the same for February. For the previous twelve months, inflation is now sitting at 2.2%, which is well within the Fed's comfort zone. This put another nail in the coffin of any projected fourth rate hike for the year, which comforted investors. Futures rose about 185 points after the Commerce Department report was released.
(13 Mar 2018) US consumer prices did rise in February, but less than in the prior month, and in the sweet spot from an inflationary standpoint. The consumer price index (CPI) rose 0.2% in February, following a 0.5% jump in January—remember how that spooked the markets? Excluding the two wildcards, food and energy, the numbers were precisely the same for February. For the previous twelve months, inflation is now sitting at 2.2%, which is well within the Fed's comfort zone. This put another nail in the coffin of any projected fourth rate hike for the year, which comforted investors. Futures rose about 185 points after the Commerce Department report was released.
Can technology really tame inflation?
(16 Feb 2018) If there is one trigger word for the volatility in the stock market over the past two weeks it is this: INFLATION. After all, it was the unexpectedly strong wage-growth report that immediately got investors worried that the Fed would have to take dramatic steps to tame the (inevitable) coming inflation. That led to the bond selloff as the 10-year Treasury inched nearer to 3%, and the big market drop. But there's an interesting opposing viewpoint gaining steam out there. This idea that technology is putting downward pressure on prices, altering the supply/demand dynamic, and keeping inflation at bay. Amazon (AMZN) provides a great example of this theory. In the old days (like, a decade ago), increased wages meant more consumer spending, which meant more demand, which meant higher prices. But, thanks to technology, a company like Amazon can continue to undercut the competitors, forcing them to keep prices low. And the number of industries affected by the likes of Amazon, Alibaba, and Wal-Mart (with its jet.com purchase) continue to grow, increasing the impact. But what about non-consumer segments of the economy? Technological automation has revolutionized the manufacturing sector. Not only can parts be built quicker and in more locations (reduced shipping costs), industrial robots have replaced human workers, keeping the wages/inflation spiral in check. Finally, advances in communications technology now allow a small organization to compete with much larger competitors without spending anywhere near as much. Ultimately, can technology really reduce the effects of inflation on society? Time will tell, but early results are promising. We will discuss this topic in depth in an upcoming issue of The Penn Wealth Report.
(16 Feb 2018) If there is one trigger word for the volatility in the stock market over the past two weeks it is this: INFLATION. After all, it was the unexpectedly strong wage-growth report that immediately got investors worried that the Fed would have to take dramatic steps to tame the (inevitable) coming inflation. That led to the bond selloff as the 10-year Treasury inched nearer to 3%, and the big market drop. But there's an interesting opposing viewpoint gaining steam out there. This idea that technology is putting downward pressure on prices, altering the supply/demand dynamic, and keeping inflation at bay. Amazon (AMZN) provides a great example of this theory. In the old days (like, a decade ago), increased wages meant more consumer spending, which meant more demand, which meant higher prices. But, thanks to technology, a company like Amazon can continue to undercut the competitors, forcing them to keep prices low. And the number of industries affected by the likes of Amazon, Alibaba, and Wal-Mart (with its jet.com purchase) continue to grow, increasing the impact. But what about non-consumer segments of the economy? Technological automation has revolutionized the manufacturing sector. Not only can parts be built quicker and in more locations (reduced shipping costs), industrial robots have replaced human workers, keeping the wages/inflation spiral in check. Finally, advances in communications technology now allow a small organization to compete with much larger competitors without spending anywhere near as much. Ultimately, can technology really reduce the effects of inflation on society? Time will tell, but early results are promising. We will discuss this topic in depth in an upcoming issue of The Penn Wealth Report.
Inflation effect: CPI figures made futures swing 500 points to the downside
(14 Feb 2018) Before the Consumer Price Index figures came in Wednesday morning, futures had been up as much as 166 points; within minutes of the CPI showing inflation swirling faster than expected, futures dropped around 350 points—a 500-plus point swing. This is a great learning experience, and further evidence that the efficient market hypothesis is bunk. Opportunities immediately arise when the market overreacts, either to the upside or the downside. The headline Consumer Price Index number, which includes food and energy, rose 0.5% in January versus the expected 0.3% jump, making the trailing twelve months' rate 2.1% versus the 1.9% expected. That isn't much above the 2% inflation target the Fed wants. Certainly, the 2.1% rate isn't high enough for the Fed to change its methodical interest rate hike trajectory. Inflation will eventually exceed what the Fed wants, but expect this game to play out in years, not months. In the meantime, take the opportunities as irrational market reactions offer them up.
(14 Feb 2018) Before the Consumer Price Index figures came in Wednesday morning, futures had been up as much as 166 points; within minutes of the CPI showing inflation swirling faster than expected, futures dropped around 350 points—a 500-plus point swing. This is a great learning experience, and further evidence that the efficient market hypothesis is bunk. Opportunities immediately arise when the market overreacts, either to the upside or the downside. The headline Consumer Price Index number, which includes food and energy, rose 0.5% in January versus the expected 0.3% jump, making the trailing twelve months' rate 2.1% versus the 1.9% expected. That isn't much above the 2% inflation target the Fed wants. Certainly, the 2.1% rate isn't high enough for the Fed to change its methodical interest rate hike trajectory. Inflation will eventually exceed what the Fed wants, but expect this game to play out in years, not months. In the meantime, take the opportunities as irrational market reactions offer them up.