The broad indexes showed some expected resilience this week after the Federal Reserve Board followed through with their promise to increase interest rates to battle inflation. While it was merely a 0.25% increase, in the guidance that followed Fed Chairman Powell confirmed the goal of the board to further increase rates at least four of the upcoming board meetings. The statement investors, and especially the algochums, liked included the promise to be more aggressive if such action becomes necessary. One uncertainty reduced thereby making volatility more tolerable for curious investors.
So, where is inflation and where is it going? The economy continued to show steady growth this week with Retail Sales rising 0.3% in February, less than expected, but also of a one year increase of over 17%. Housing Starts showed a strong increase as the demand for housing continued, although permits for future expansion decreased slightly. Lastly, this week saw Industrial Production increase a healthy 0.5% in February suggesting the follow up demand will have some influence on inflation. Worth noting in these three pieces of economic data is that Retail sales being less than expected suggests some resistance to inflation may also be showing up. And while Housing Starts continued its strong growth, in my opinion, it has as much to do with the surging growth of retiring baby boomers as the higher wages of the current workforce. And interest rates would have to rise significantly to discourage Baby Boomers, so we’ll have to wait and see. The outcome of current economic data is mixed but the impact on inflation seems consistent. Last week the Consumer Price Index rose 0.8% February, bringing the one year rise to 7.9%. More concerning was this week’s release of the Producer Price Index (PPI) showing an increase of 0.8% taking the one year rise over 10%, not a welcome level for inflation of any kind. Much of the current comments coming from various Statewide Fed Presidents seem to suggest being aggressive sooner rather than later and I’d rather focus on those comments than those coming from the media pundits. That’s because interpretations made by them that may have been formerly thought to contain real information quickly become suspect because, in my opinion, they tend to be constantly reinterpreted. I’ll take the side of caution.
So, with a windfall of information the uncertainty surrounding inflation is starting to clear up, leaving one more uncertainty left, at least for now. But there will always be uncertainty to feed on in the age of the internet. This week saw some positive price activity for the broad indexes consistent with their oversold condition. But when momentum is subjected to an oversold condition it’s not the same as when analysis of the average changes over a given time period, called Moving Averages, also show signs of being oversold, with one exception, the overall market is dependent on averages recovering for the bulls to regain control. Simply put, it feels good, but it is still wise to stay alert, and we have a few new investments to add to should some volatility return.