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Higher Inflation Will Be "Helpful" -- Just Trust Us!

05-23-2018

A few notable things occurred while I was away, although the stock market was on the tame side, and an argument can be made that it is still building a top, particularly if you look at the Dow or S&P (even the Nasdaq and Nasdaq 100 could be labeled that way, although they have made more progress back toward the highs).

Three Is a Magic Number In one surprising development (I say "surprising" because everyone thought it would matter a great deal), the 10-year pierced 3% and the world didn't end. I don't have an opinion whether 3% should or should not matter, but I do recall a lot of people thinking that particular round number would be consequential for many markets and it really hasn't been, at least thus far. (Perhaps one could say it has affected the dollar, which saw the continuation of a strong rally based on confidence in the Fed and lack of confidence in other G-7 central planning organizations.)

Macro news also seemed to favor the dollar, namely because Trump was "bringing" North Korea to the bargaining table and Chinese trade tensions were going to be defused. I'm not sure that people's expectations on those two topics will play out the way they seem to think, but nonetheless that appears to be the consensus.

How "Temporary" Are We Talking? As for today's action, the stock market opened a little lower, then staged a rally back to around unchanged in the wake of dovish FOMC minutes, in which they noted that, "…a temporary period of inflation modestly above 2 percent would be consistent with the Committee's symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations." Oh, yeah? We will see how helpful it turns out to be.

By day's end, the market was modestly higher with the Nasdaq outpacing the other indices by a large margin, as it gained 0.5%.

Holler for the Dollar Away from stocks, green paper was mixed, with the yen finally reversing a bit and getting stronger as the euro continued to be clubbed for any number of reasons. It seems to me that any euphoria over the dollar has reached a crescendo, but until it reverses I suppose every headline will be deemed bullish for it. Oil was a nonevent, though it did manage to overtake the $70 price while I was away, and fixed income was slightly higher, particularly at the long end.

Turning to the metals, which were weak in my absence, silver, which had ignored the recent weakness in gold, was 0.5% lower today, while gold itself was $2 higher. As for the miners, all in all, they behaved pretty well while I was gone and again today.