Tensions from the Ukrainian-Russian standoff over the Crimean region were temporarily pushed aside by a busy week of economic data releases. The ISM Manufacturing Index kicked things off, showing a 1.9 point improvement to 53.2 in February (readings above 50 signal expansion). This was a bigger expansion than was expected by economists, but recovered only part of the weather-related decline in January. The JPMorgan Global Manufacturing PMI also rose to its highest reading since April 2011. The broad strength evident in this week’s global manufacturing provides some evidence that the global economic expansion remains intact despite the market volatility of early 2014. Meanwhile, the ISM Prices Index remained above 60 for the second straight month and at the upper-end of its range over the past two years, perhaps indicating some burgeoning inflationary pressures which are not yet widely appreciated. Much of the labor data was also modestly positive.
For the week, the S&P 500 gained +1.00%, the Dow increased +0.80%, and the MSCI EAFE (developed international) lost -0.33%.
Here are the 3 stories this week that rose above the noise:
Perfect Storm for Inflation Could Rock the Market
In a recent CNBC.com article, Alex Rosenberg examines rising inflationary threats caused by an improving labor market and rising commodity costs. Corporate profit margins are at an unsustainable level because of tempered labor and input costs, so it is likely they will contract in the near future. But, if inflationary pressures heat up too quickly, the Federal Reserve may be forced to take a hawkish stance. The S&P 500 hit another all-time high last week, but stretched earnings multiples coupled with increasing inflationary pressures could be the catalyst for a correction in U.S. equities this year
Hilsenrath : Fed Likely to Continue Taper
A blog post from The Wall Street Journal’s Jonathan Hilsenrath, who is widely followed for his coverage of Fed policy, makes the case that the Federal Reserve is unlikely to change its tapering strategy at its March 18-19 meeting. Per Hilsenrath, Fed officials have indicated the bar is high to alter their current strategy of reducing monthly asset purchases by $10 billion at each policy meeting.
Recent economic data, including Friday’s jobs report, does not appear sufficiently weak to alter Fed policy. In fact, Hilsenrath mentioned a burgeoning increase in wage pressures that some analysts believe signals increased consumer inflation is likely to take hold in the coming months. The key takeaway is that the Fed is likely to continue its tapering strategy at next week’s policy meeting.
Will America Heed the Wake-up Call of Ukraine?
As the Ukrainian crisis plays out, this Washington Post article from former Secretary of State, Condoleezza Rice, provides perspective on what is at stake and why the crisis may not be over soon. She argues “the immediate concern must be to show Russia that further moves will not be tolerated, and that Ukraine’s territorial integrity is sacrosanct.”
She further argues that appropriate sanctions include diplomatic isolation, asset freezes, and travel bans against oligarchs. The longer-term task is to answer Putin’s implied statement about Europe’s post-Cold War future. Putin is trying to turn the clock back as far as intimidation through military power, economic leverage, and Western inaction will allow. Positively, the article points out that the West has political levers to pull should it decide to heed the wake-up call.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
