Will The CPI Again Become A Top Tier Data Point?

By: Kent Engelke | Capitol Securities

About a month ago, only industry veterans of more than 10 years remembered the significance of the monthly release of the CPI and PPI. The data was ranked just below in importance to that of the monthly BLS labor report.

Today, everyone will scrutinize today’s release of the CPI and tomorrow’s posting of the PPI for inflationary pressures. As noted many times, six weeks ago, all thought secular deflation and stagnation, or the environment of the last 10 years, would last into perpetuity.

This view has radically changed, partially the result of the synchronistic global recovery, perhaps the result of the ending globalism and interdependency, the repeal or at least a freeze of onerous regulations and tax cuts. Since 1945, the US has been the engine of world growth and in many regards as the US goes, so does the rest of the world.

It was reported yesterday that US Small Business optimism rose to the highest monthly level since 1986. Thirty-two percent said now was a good time to expand business, exceeding all monthly figures to 1986 and quarterly readings back to 1973. The data has been surging since the 2016 election.

To remind all, the last golden era of small business was during President Clinton’s second administration, where 90% of job creation was from small business defined as fewer than 499 employees. It was also the last era when GDP growth topped 4% per annum for almost four consecutive years, creating a budget surplus.

It is generally accepted the reason for this surge in activity was tax, welfare and regulatory reform. Is history repeating itself?

Last week, I referenced the Dallas Fed stating that capital spending outlays during the last six months was the strongest on record… records dating back to 2001. Economics 101 dictates a rise in capital spending increases, employment, wages, productivity and GDP.

Speaking of hiring, one in five small companies said they plan to boost hiring, unchanged from the prior month, the result of the lack of qualified workers. The data states 34% of firms were unable to fill vacancies in January, up from 31% which was close to a 17-year high. Moreover, 24% of firms expect to increase pay over the next three months, the greatest in 29 years. Wow!

Will the 8:30 data reflect the above optimism [or pessimism depending upon one’s preconceived bias]? Such can potentially impact equity prices for if demand pull/cost push inflation is accelerating, bond yields can trade higher which can negatively impact equities. It is an example of “good being bad,” but all must remember “bad was viewed as good” for the last 10 years for this ensured lower interest rates.

The consensus view is a 0.3% increase in the overall CPI and 0.2% gain less food and energy.

Commenting briefly about yesterday’s market activity, markets were relatively quiet ahead of today’s data.

Last night, the foreign markets were up. London was up 0.78%, Paris was up 0.92% and Frankfurt was up 0.68%. China was up 0.43%, Japan was down 0.43% and Hang Sang was up 2.27%.

The Dow should open moderately higher, but this could change significantly given the attention on the CPI data which can potentially influence the trajectory of monetary policy and interest rates. The 10-year is unchanged at 2.83%.