Change Is The Only Constant

By: Kent Engelke | Capitol Securities

Wow! Change is indeed the only constant and it is only the volatility of change that changes. Last Monday I wrote the S & P 500 was on the verge of the worst week since October 2008. Last week the S & P 500 was on track for the best week since 2013. The previous week, selloff was predicated upon stronger than expected growth and inflation.

In my view, the pickup in inflation is the real deal. With the continuing tightening of the labor market that is feeding into stronger wage growth, the depreciation of the dollar providing a boost to goods prices and the acceleration of global economies led by the US, all amplified by tax and regulatory reform and an increase in monetary velocity, I think core inflation will be above 2.50% by year end.

Wow! This is a dramatic increase from the current 1.8% year over year core increase. This week the FOMC releases the Minutes from its January meeting. As noted many times, 45 days ago, the market had not yet discounted 2 interest rate increases much less than the forecasted three. Will the Minutes suggest the possibility of a fourth?

Commenting about the data released Friday, import prices were considerably higher than expected. Sentiment surveys surged to the second highest level since 2004. A sub-data point that I find of great significance is that homeowners saying today is a good time to sell rose to the highest level in a decade with respondents believing that home values will increase by 2% in the next year, the highest since 2007.

Many times I have commented about OER or what someone thinks they can rent their home for if the property is indeed a rental. OER is closely correlated to apartment rents and home prices. Rental rates are posting double digit increases for several consecutive years. The data suggests home prices are surging, but this data is skewed by the large urban areas of CA, NY and Northern VA. Generically speaking, home values have still not rebounded back to 2007 levels. Is this about to change as wealth transfers back to Main Street from Wall Street?

As noted many times, OER comprises about 30% to 32% of inflationary indices and has been virtually nonexistent since 2007. Will OER accelerate, the result of increased optimism in home prices as measured by the most recent sentiment survey? If so, how will this data impact inflationary expectations and bond prices?

What will happen this week?

Last night the foreign markets were mixed. London was down 0.14%, Paris was up 0.11% and Frankfurt was up 0.07%. China was closed for a holiday, Japan was down 1.10% and Hang Sang was down 0.78%.

The Dow should open moderately lower as Treasury yields are heading higher and the dollar is dropping. Oil is up about 1% as OPEC concluded “the markets journey toward equilibrium is gaining speed.” The 10-year is of 7/32 to yield 2.85%.

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