The Dow snapped a two-day losing streak, rallying 112 points on mostly good news, which contradicts the notion that stocks need bad news to rally higher from here. However, I continue to say that stocks can move higher if Fed hikes are justified.

In the last Federal Open Market Committee (FOMC) meeting Eric Rosengren, a confirmed economic dove, pushed back from chairwoman Yellen, and joined two dyed-in-the-wool hawks to vote for a rate hike.   

Everyone has to sit up and take notice when doves become hawks and hawks become doves because it means something is cutting through the core of one’s belief system.

We usually assume that such a move reflects an individual’s epiphany that everyone else should pick up on if they haven’t already.  Rosengren telegraphed his vote, exposing a rationale completely at odds with the data at the time.  So, the market tanked, and bears all pointed to a greater potential of a 25- basis point rate hike rather than how disconnected from reality this voting member of the FOMC was at the time.

And fast forward to the latest dove that appears to be turning into a hawk; Charles Evans.  In a speech in Auckland, New Zealand (these position shifts are often articulated outside the country), the Chicago Fed Reserve Bank President said that he would be “fine” with raising rates by year-end if U.S. economic data continues to come in firm.   

Well, yesterday saw a very strong report on the service economy, and there are continued signs that businesses can no longer put off major projects.

Core Business Durable Spending:

• June $62,437,000,000
• July $62,931,000,000
• August $63,523,000,000

Evan’s comment added a caveat to going along with interest hikes, saying any further moves would need to see inflation accelerating but inflation isn’t accelerating.

Inflation Illusive

Although Factory Orders and the ISM Non-Manufacturing didn’t move the needle for the Atlanta Fed Gross Domestic Product (GDP) model, components including the sharp improvement in employment suggest higher wages, which ultimately means higher inflation but for now- it’s very elusive.

There are signs that rents have peaked; more than likely, the drug industry might take a pause on gouging, leaving only health insurance as a serious source of inflation. Sadly, that’s only going to get worse.  If voting members of the Fed are using inflation as a gauge, interest rate hikes may be put on pause.

August CPI	Y/Y Change	% of Importance
Food at Home	-1.9%	8.0%
Food Away from Home	+2.8%	5.8%
Gasoline	-17.8%	3.2%
Prescription Drugs	+6.3%	1.4%
Rent	+3.8%	7.7%
Health Insurance	+9.1%	5.9%

One Inflation Concern

I am concerned about commercial real estate and home prices in big markets. A part of my concern is anecdotal, but traveling to many U.S. cities these days, it feels like Dubai during its go-go growth period that saw 25% of the world’s cranes, erecting buildings, and a man-made indoor ski slope and mountain.

In yesterday’s WSJ, there's an article on rents declining in big cities coupled with a report from the Corcoran Group of Manhattan; the average sale prices for apartments have been decreasing in the second quarter, 6% from the first quarter. 

The good news is that residential housing prices have cooled and are pulling back a bit after the influx of Wall Street and Chinese money, which bought everything in sight.  I must admit that commercial real estate and big cities look frothy.  I am not sure about the kind of domino effect we could see, but it’s something to keep on your radar.

Market

There was some profit-taking into the close yesterday; while it continues to be a cautious aura to the market, I saw hints of panic-buying, suggesting a breakout to new highs that would be aided by late- arriving smart money and massive short squeezes. Of course, everything hinges on the jobs report; I am saying that it can be too hot…but not too hot! LOL

Today’s Session

We could trade sideways as the street braces for the jobs report, Hurricane Matthew, and Sunday’s presidential debate.

This morning initial jobless claims edged lower, which gives credence to those suggesting full employment.  While I would say that’s naïve and hyperbolic the data is officially near the all-time low point.

 

 

Comments

The big urban market have been overheated and are primed for a pull back. Also they are fueled by top 2% income earners with outsized bonuses the past couple of years. Isn't it interesting that rising prices (inflation) is highest in the one area Obama promised would decline with the ACA! Clearly the past 8 years and next four if HRC wins will continue to under perform. As an investor the one area regardless of the winner that may grow is core infrastructure plays. Garro on 10/6/2016 9:52:50 AM

The whole picture is definitely taking on the appearance of a house of cards. The "system" will be incapable of responding when the cards begin to fall. Get your house in order now. z on 10/6/2016 10:48:08 AM

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