by Franklin J. Parker
The Summary
- The fundamental economic data was pretty mixed last week. Personal incomes for April dropped unexpectedly after the majority of stimulus payments were distributed in March. We saw personal spending decline, as well. Core PCE (personal consumption expenditure—the Fed’s preferred measure of inflation) jumped more than expected, and it was the highest 12-month jump in the metric since 1992. Again, price comparisons to last year are fraught since prices had declined so significantly, so much of the jump can be attributed to simple normalization. Initial unemployment claims dropped to the lowest level since the Covid-induced recession began. 406,000 people filed for initial unemployment claims. While this is still very high on a weekly basis, it is much more normal! Initial claims under the 225,000/week mark would be consistent with an expansionary economy.
- Kurt Campbell, Biden’s National Security Council coordinator of Indio-Asian Affairs, made news last week with his quote, “The period that was broadly described as engagement has come to an end…the dominant paradigm is going to be competition.” Slowing and reversing the trends of globalization—especially with regard to China—appears to now be a bipartisan consensus. As I wrote last week, this reversal will likely lead to upward price pressure on consumer goods over the longer-term.
- We get another read on the health of the labor market this Friday with the posting of the headline unemployment rate. Factory orders also post this Friday. The consensus is a slight downtick in the unemployment rate, and a slight contraction in factory orders. Considerably better data may push markets around, as belief that the Fed will keep current policy going is fading.
The Details
Well, it is time.
The Fed has decided it is time to start talking about talking about tapering (“tapering” is just Fed-speak for “slowing down our money-printing”). At April’s press conference, Chairman Powell was asked whether it was “time to start talking about talking about tapering,” to which he responded “no it’s not time yet. We’ve said we’d let the public know when it is time to have that conversation, and we’ve said we’ll do it well in advance of any decision to taper our asset purchases, and we will do so.”
With inflation posting hotter than expected, two Fed vice chairmen both declared last week that the Fed would begin to talk about slowing the Fed’s pace of money-printing. Given that both vice chairmen are on Powell’s leadership team, their comments carry quite a bit of weight. It is now widely expected that the Fed will discuss an end to their ongoing quantitative easing program (“quantitative easing” is just Fed-speak for “money-printing”).
Of course, an end to quantitative easing (QE) is likely to create a headwind for markets. According to my back-of-the-envelope calculations, an end to QE makes market growth about 4.5% less than it otherwise would be. Earnings growth is still the largest single factor in market returns, so these forces must be weighed by investors—there is not a clear course of action.
As I have said before, mental flexibility and agility may be our best weapons in this unknown economic climate.
Chart of the Week
The Euro area is still reeling from the Covid recession. All but two countries are still seeing significant economic contractions, even in Q1 of 2021. For the first time in a while, investors may be well served by increasing allocations to developed economies in Europe, especially if we expect their growth to turn a corner with increasing vaccination rates.
A major challenge to overseas investing, however, is the currency exchange rate. Dollars must be converted to Euros to buy shares of European companies. If the Euro weakens relative to the dollar, US-based investors can lose money on an otherwise profitable investment. The point is, there may be opportunity, but it must be carefully evaluated.
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