Inflation, where are you?

Minutes Matter

Remember the Fed meeting two weeks ago when they decided to keep interest rates unchanged and effectively hit pause on their tightening policies? We got to see the minutes from that meeting this week and their decision was driven by economic data indicating slower growth in the US, Brexit (the “will they, won’t they” drama continued this week with yet another extension), and of course can’t forget trade tensions with China. To my surprise, the FOMC also called out the lack of inflation in response to wage growth and pricing pressure from tariffs. While policy changes were indicative of a cautious stance toward the economy, some FOMC members refused to rule out further rate hikes later this year, convinced that the strong labor market is going to contribute to improved consumer spending through the next few quarters.

Moral of the story: Most of the FOMC seemed to believe the weakness we saw in the first quarter is not indicative of the growth we will see for the remainder of the year. The Fed has definitely demonstrated a focus on reducing financial instability in the current environment littered with uncertainty but is leaving some room to make moves on tightening policy in the future if such an opportunity arises. 

Speaking of Inflation…

March CPI inched up 0.4% as inflation was buoyed by rents and energy (driven by gasoline and electricity prices), but broader pricing pressures remained muted given the slowdown in the economy in the first quarter. March PPI showed slightly more strength, rising 0.6%, but the story here is the same as pretty much the entirety of this gain is attributable to increasing energy prices. 

Moral of the story: Inflation has come off after some large gains last year and these reports continue to support the Fed’s discussion from the prior policy meeting (see above) – the lack of inflation-driven pressures is allowing the Fed to continue being patient on raising rates.

Earnings are here (part 1)

Earnings season is somehow upon us already and two big banks released first quarter results this week – JP Morgan and Wells Fargo. JP Morgan’s results came in ahead of expectations on both the top and bottom lines because of higher interest rates boosting the bank’s retail lending business. Commentary from management was quite bullish, citing rising employment and wages, and healthy consumer and business confidence. Wells Fargo also reported earnings ahead of expectations but had a slightly bearish tone, citing a lower interest rate outlook and higher competition. However, Wells Fargo did report a 5-6% increase in credit and debit card transactions in addition to a 24% increase in auto loans.  

Moral of the story: Despite Wells Fargo’s bearish outlook, the reported numbers seem indicative of a fairly healthy consumer. The company’s financial and operational story is “hairy” and could very well be a large contributor to the company’s less-than-rosy outlook. Given the conflicting sentiment between these two names, however, my eyes are on the rest of the big banks reporting earnings next week.