Analysis: Wall Street sinks and Trump is his own worst enemy

April 3, 2018  06H:45  GMT/UTC/ZULU TIME

by Judith Stein and Biodun Iginla, BBC News and Reuters Financial Analysts, San Francisco

SAN FRANCISCO  - As far as the stock market is concerned, U.S. President Donald Trump is, right now, his own worst enemy.

FILE PHOTO: U.S. President Donald Trump arrives at Palm Beach International Airport, Florida, U.S. for the Easter weekend at Mar-a-Lago in Palm Beach March 29, 2018. REUTERS/Yuri Gripas

The president - who frequently touted Wall Street’s rally following his 2016 election victory - was partly blamed for a sharp stock selloff on Monday that investors believe is likely to continue, deepening cracks in a nine-year-old bull run.

The selling was sparked by escalating fears of a trade war as China slapped tariffs on a host of U.S. goods as Trump prepares to impose tariffs of more than $50 billion on Chinese imports, and by Trump’s renewed criticism of Amazon.com Inc (AMZN.O).

“The president’s behavior is now beginning to impact the capital markets - both the averages and individual equities,” said Doug Kass, president of Seabreeze Partners Management in Palm Beach, Florida.

Particularly worrisome to investors on Monday: more weakness in the tech sector, which led the market up in recent months, and a breach below a major S&P 500 technical level.

In a Twitter post, Trump attacked Amazon for a second time in three days over the pricing of its deliveries through the United States Postal Service and promised unspecified changes.

Amazon’s stock slumped 5.2 percent and led the S&P 500 and Nasdaq down, pressuring other high-growth, technology-related stocks, including Microsoft Corp (MSFT.O), Apple Inc (AAPL.O) and Facebook Inc (FB.O). Outcry in recent weeks over Facebook’s handling of data about its users has shaken the tech sector with fears of greater governmental oversight.

People walk by a Wall Street sign close to the New York Stock Exchange (NYSE) in New York, U.S., April 2, 2018. REUTERS/Shannon Stapleton

“(One) big factor is Trump further going after the tech sector, namely Amazon,” said Tom di Galoma, managing director at Seaport Global Holdings in New York. “It casts a shadow effectively around all of the tech sector.”

TECH SECTOR PAIN = MARKET PAIN

The selloff in technology-related stocks was seen as a particularly worrisome sign for investors who have banked on that sector continuing to drive the broader market.

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“It’s very significant,” said Michael Purves, chief global strategist at Weeden & Co in New York. “Selling tech is not a sector rotation story, its a sell-the-market story.”

Technology stocks have been widely viewed in recent months as a “crowded trade” - with most investors having the same opinion, increasing the potential for a volatile selloff if sentiment changes.

“What we’ve learned over the past two weeks is just how overweight investors were in technology,” said Nicholas Colas, co-founder of Datatrek Research, New York.

Investors saw more selling pressure ahead, particularly after the S&P 500 .SPX dipped below a major technical level, the 200-day moving average, for the first time since Britain voted to leave the European Union in June 2016. The index closed at 2,582, for a year-to-date decline of 3.4 percent.

“We have been pounding on the 200-day for the last six sessions and now we’ve broken through,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas. There may be support around the 2,537 level, he said, “but then below that we may be looking at 2,500 or so again, which is pretty scary.”

In Trump’s first year as president, the S&P 500 surged 24 percent on bets he would boost the economy with fiscal spending, deregulation and deep tax cuts. Trump tweeted frequently about the stock market as it rallied through 2017. But since a selloff in February, he has been noticeably silent.

But this bull market has frequently staged swift recoveries, and some were poised for opportunity.

“I’m taking advantage of these markets and am heavily overweighted financials and banks,” said David Kotok, chairman and chief investment officer Of Cumberland Advisors in Sarasota, Florida. “I didn’t buy today, we’re in freefall, but I might tomorrow.”

Analysis: U.S. consumer prices accelerate

February 14, 2018  15H:05  GMT/UTC/ZULU TIME

by Judith Stein and Biodun Iginla, BBC News and Reuters Financial Analysts, Washington DC

WASHINGTON - U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

FILE PHOTO: A Walmart employee helps a customer navigate a flyer at the store in Broomfield, Colorado November 28, 2014. REUTERS/Rick Wilking/File Photo

The fairly strong inflation report from the Labor Department on Wednesday could put more pressure on U.S. financial markets, which were spooked by a surge in annual wage growth in January.

Inflation concerns sparked a sell-off on Wall Street and boosted benchmark U.S. Treasury yields to a four-year high.

There are fears that inflation, which is seen as being driven by a tightening labor market and increased government spending, could force the Fed to be a bit more aggressive in raising rates this year than is currently anticipated. That would slow economic growth. The U.S. central bank has forecast three rate hikes for this year, with the first increase expected in March.

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The Labor Department said its Consumer Price Index increased 0.5 percent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 percent in December. The year-on-year increase in the CPI was unchanged at 2.1 percent as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 percent. That was the largest increase since January 2017 and followed a 0.2 percent rise in December.

The year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January, also because of less favorable base effects.

Economists polled by us at Reuters had forecast the CPI increasing 0.3 percent in January and the core CPI rising 0.2 percent. The core CPI is viewed as a better measure of underlying inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank’s 2 percent target since mid-2012.

FILE PHOTO: A woman shops at an H&M store in New York City, U.S. December 23, 2017. REUTERS/Stephanie Keith/File Photo

INFLATION BUILDING UP

Base effects will turn more favorable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 percent on an annual basis in January, the largest rise since June 2009, from 2.7 percent in December.

A pickup in wage growth as the labor market hits full employment is expected to contribute to higher inflation this year. Price pressures are also seen being fanned by fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending.

Last month, gasoline prices rebounded 5.7 percent after falling 0.8 percent in December. Crude oil prices surged in January on strong global demand and a weaker U.S. dollar. Food prices rose 0.2 percent in January, likely reflecting dollar depreciation.

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The core CPI was boosted by rising rents. Owners’ equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, gained 0.3 percent after rising by the same margin in December.

The cost of healthcare services increased 0.4 percent, with prices for hospital care jumping 1.3 percent and doctor visits rising 0.3 percent. Prices for new motor vehicles slipped 0.1 percent last month and apparel prices surged 1.7 percent.

With the January inflation report, the government incorporated some methodology changes which economists say could inject volatility into the data going forward.

Used car prices changed to a single-month price change from a three-month moving average. Smart phones are now quality-adjusted to account for the rapid rate of technological advancements and improved quality to customers.

Analysis: US inflation and what it means for markets

February 14, 2018  09H:06 GMT/UTC/ZULU TIME

by Judith Stein and Biodun Iginla, BBC News and Reuters Financial Analysts, New York

U.S. financial markets have been roiled recently by something neither the economy nor investors have had to contend with for the better part of a decade: concerns they may soon have to reckon with rising inflation.

FILE PHOTO: A man unloads vegetables at Grand Central Market in Los Angeles, California, March 9, 2015. REUTERS/Lucy Nicholson

The S&P 500 .SPX.INX is down more than 7 percent from its lifetime high hit on Jan. 26, after falling as much as 10.2 percent, and yields on the benchmark U.S. 10-year note US10YT=RR have climbed to a four-year high, largely due to worries over inflation.

What exactly is inflation, aside from a rise in prices for goods and services, and why is it having such a strong effect on markets?

Inflation is measured in a number of ways by various government agencies, and as long as the economy continues to expand it will be a consideration for markets.

Investors will get the latest inflation data on Wednesday with January’s Consumer Price Index and on Thursday with the monthly Producer Price Index.

WHAT IS INFLATION AND HOW IS IT MEASURED?

While inflation decreases consumer purchasing power, a certain level of inflation is considered a reflection of a strengthening economy and the impact on consumers can be offset by rising wages.

The U.S. government publishes several inflation measures on a monthly and quarterly basis. The main measures are the Consumer Price Index (CPI) and the personal consumption expenditures (PCE) price indexes. The CPI and PCE are constructed differently and perform differently over time.

The monthly CPI, compiled by the Labor Department’s Bureau of Labor Statistics (BLS), measures the change in prices paid by consumers for goods and services. The BLS data is based on spending patterns of consumers and wage earners, although it excludes rural residents and members of the Armed Forces.

CPI measures the prices that consumers pay for frequently purchased items. The components are weighted to reflect their relative importance, with the weightings derived from household surveys. Some of the components of the CPI basket such as food and energy can be volatile. Stripping out food and energy from the CPI gives us the core CPI, which is seen as a measure of the underlying inflation trend.

Another reading is the Producer Price Index (PPI), which measures prices from the seller’s point of view.

The Federal Reserve, whose mandate includes price stability along with maximum employment, prefers the personal consumption expenditures (PCE) price indexes constructed by the Commerce Department’s Bureau of Economic Analysis. PCE is considered to be more comprehensive because it includes some components that are excluded from the CPI. According to the BEA, the PCE reflects the price of expenditures made by and on behalf of households. Weights are derived from business surveys.

Housing has a greater weighting in the CPI than in the PCE index. The weighting for medical care is greater in the PCE price index than in the CPI. As with CPI, food and energy components of the PCE are volatile. Stripping them out yields the core PCE, which measures the underlying inflation trend. The core PCE is the Fed’s preferred measure for its 2 percent inflation target.

(Graphic: Wage growth in the U.S. accelerates - reut.rs/2EAEGey)

WHAT SPARKED THE RECENT INFLATION WORRY?

The government’s monthly employment report for January, released on Feb. 2, showed wages posted their largest annual gain in over 8-1/2 years, suggesting the economy was moving closer to full employment and inflation was on the horizon.

If the economy continues to gain momentum, inflation is likely to rise further toward the Fed’s 2 percent target. There is concern, however, that the recent U.S. tax overhaul by the Trump administration, which greatly reduced the corporate income tax rate as well as cutting personal income tax rates, could cause an economy that may be nearing full capacity to overheat and cause the Fed to become more aggressive than currently anticipated in its course of interest rate hikes.

Markets are currently pricing in an 87.5 percent chance of a quarter-point hike at the central bank’s next policy meeting, in March. The Fed has forecast three hikes this year, after raising rates three times in 2017.

Some market participants are unsure about how the swiftly the Fed will react to inflation and market turbulence under its new chair, Jerome Powell. The March meeting will be the first since Powell took over from Janet Yellen. Recent comments from some Fed officials suggested the possibility of more hikes should the economy continue to strengthen.

(Graphic: U.S. Inflation vs Wage Growth - reut.rs/2BpZt4S)

HOW HAS INFLATION AFFECTED MARKETS?

Many analysts believe the stock market was overdue for a pullback because valuations, as measured against corporate earnings, have been rich by historic standards, and that the employment data showed economic fundamentals underpinning stocks are strong. In addition, inflation has yet to rise to concerning levels, and as long as the pace remains modest, stocks have room to climb.

Healthy economic growth, along with U.S. deficit spending and the move by global central banks to lift interest rates from ultra-low levels, has driven U.S. bond yields to a four-year high. Rising yields could dent the attractiveness of high-dividend-paying stocks to investors and trigger increased borrowing costs for U.S. companies and households, which could crimp economic growth.

A strengthening currency would normally go hand-in-hand with an improving economy, yet the U.S. dollar is near four-year lows even after a recent uptick. Some of the weakness has been attributed to anticipation of scaling back in stimulus measures by central banks other than the Fed.

If the U.S. economy fails to show any meaningful uptick in inflation as currently feared, that could tie the Fed’s hands when it comes to interest rate hikes and drag the dollar lower.

(Graphic: S&P 500 vs U.S. 10-yr Treasury Yield - reut.rs/2ss7KST)

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