Is It Time to Raise Interest Rates...
One day does not a bull market make. And we saw that clearly yesterday, when Tuesday's strong rally was reversed. We also got an answer to the question "At what point does the rally for the U.S. dollar push stocks and commodities lower?"
Oil prices dropped below $100 a barrel as more inventory builds, combined with the stronger dollar, brought out sellers.
Of course, oil is a tale of two regions. Demand may be stagnant in the U.S., but in China, and other merging markets, oil demand is surging. Despite higher prices, oil demand is already growing faster than the 7% some expected just a few months ago.
Price does not affect demand in China the same way to does here in the U.S. That's because China wasn't built on cheap oil prices. So, because cheap oil and gasoline isn't built into China's economy, consumer spending there is less affected by higher gas prices.
*****Speaking of China, its efforts to slow inflation seem to be working. Inflation slowed slightly in April, to 5.3%. Now, that's a small drop from March's 5.4% reading. And the government raised reserve requirements for banks again.
Still, given that the inflation story in China is a significant part of the slowing- global-growth story, any sign that China may be engineering a soft landing for inflation is a positive.
Now we'll see if the Fed can engineer a soft landing...
*****The Producer Price Index (PPI) for April came in at 0.8%, hotter than the 0.6% that was expected. While the usual suspects, food and energy helped push the inflation number, the core reading, which excludes food and energy, also exceeded expectations, at 0.3%.
Wages are not rising, but it's hard to call that a bright spot. The Fed likes to focus on wage inflation as its primary inflation measure. But when unemployment is so high, it's tough to get any upside for wages. So we're stuck with rising prices and stagnant (or falling) wages. That just makes it more difficult for the consumer to manage spending, though you wouldn't know it from April's retail sales numbers, which were up 0.5%.
*****Yesterday's selling drove the S&P 500 back to the support level around 1,330-1,340. The next support level to watch is 1,301.
The current P/E ratio for the S&P 500 is 17, and the forward number is 13.6. As has been the case for some time, we can't call the S&P 500 overvalued, nor can we call it cheap.
Earnings have once again come in solid so far. And so investors should be focused on economic data and the trajectory of the U.S. dollar.
Will inflation push the Fed to move earlier than it wants to? Or will a weakening economy encourage the Fed that more stimulus is needed?
Obviously, these questions are polar opposites. But it seems that these are the only choices of action for the Fed, assuming it wants to take action. It's more likely, however, that the Fed wants to see how the economy responds to the end of QE2.
And I'll admit, I'm curious about that, too...
