"Inflation is one form of taxation that can be imposed without legislation" Milton Friedman

Plenty to focus on at the end of another week. Commodity prices have reacted to the increased geopolitical risk, particularly the price of oil. That can have an impact on inflation expectations and possibly central bank’s policy. Higher commodity prices due to economic growth is a good thing, for a while, as it is as a result of increased demand. If the rise in commodity prices is due to geopolitical concerns, that can stoke inflation expectations and contract growth, not a good mix for central bankers to deal with.

There has been plenty of macro news to digest over the past few days. The data from Europe continues to give the impression that the economic growth is topping out. Recent Purchasing Manager Surveys have failed to meet expectations and more recently Industrial Production and retail sales have weakened. There remains no sign of economic recession, but we may be past the best of the good economic news. A view we have been expressing for a few weeks. The good news is that equity markets can continue to rise despite weakening data. They tend not to fall historically until the recession hits.

The Federal Reserve and the ECB have released the minutes from the interest rate meeting in March. For the Federal Reserve, it was the meeting in which they raised interest rates for the first time this year. The headlines seem to be that some members are in favour of a more aggressive action. This would suggest some members are in favour of four hikes rather than three in 2018, as the economic outlook has improved after a slow start. The recent release of the Consumer Price Inflation in March which had climbed to 2.1% could well have influenced some members. The US yield curve has continued to flatten, the gap between the two and ten-year US treasury maturity has recently fallen below 50 basis points. The narrowest it has been since 2007.

The ECB minutes did little to dispel the current expectation that the ECB will continue to buy assets until September and continue to wait for some while before raising interest rates.

Geopolitical tensions continue, we have discussed the impact that it has recently had on commodity prices. Historically the impacts on asset prices can be temporary and often provide good buying opportunities as the government’s move back from the brinkmanship position.

The earnings season for the first quarter kicks off tomorrow with several of the major US banks reporting. Expectations are for a strong earnings quarter, as we mentioned at the start of the week. It could be that expectations have been raised to a point that brings the travel and arrive adage to mind.

Posted on April 12, 2018 .