Is the narrative about to change about the strength of the economy and inflationary pressures? June’s core CPI rose by 0.2% for the third consecutive month, a rise from increased shelter costs. The core CPI is now up 2.3% from June 2015, matching the largest year over year advance since the expansion began in mid-2009. As noted many times, shelter costs are the largest component of most inflationary indices and have been muted since 2007.
I rhetorically ask what will be the ramifications if shelter costs continue to rise from extremely depressed levels? Will the bond market radically change its views of inflationary expectations?
June’s retail sales were also stronger than expected. The retail sales group (excludes autos, building materials, food and gas and utilized to calculate GDP) rose at a 7.4% annual rate, the fastest rise in over two years.
Against this backdrop, estimates for second quarter growth have been increased from a low “two handle to a high two handle.” Inflationary expectations have also risen.
Yields in the Treasury market rose again Friday on the data and the German 10-year note is now back into positive territory on the emerging belief the US will continue to be the proverbial locomotive of global growth.
There is little on this week’s economic calendar other than housing data, which in itself is significant given that the great recession commenced in housing and will end with housing. Moreover the vast majority of people gauge their net worth by the value of their homes not their stock account.
Earning season accelerates this week. The few results posted last week were encouraging albeit expectations have been greatly reduced.
Last night the foreign markets were mixed. London was up 0.44%, Paris down 0.08%, and Frankfurt up 0.08%. China was down 0.53%, Japan up 0.68% and Hang Sang up up 0.66%.
The Dow should open nominally higher, displaying resilience after a failed coup in Turkey, mayhem in France, cold blooded murder in Baton Rouge and raising political chaos throughout the democratic and developed world. And then there are earnings, estimates which have been dumbed down to levels that may create an environment that almost any release will be an upside surprise. The 10-year is off 5/32 to yield 1.41%.