Daily Commentary

MarketMinder’s View: While this article’s titular overarching point is spot on, how it arrives there is less sensible. Start with this fine observation: “What at one point seemed set to be a third big inflation shock this decade—after the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine—appears to have been of little consequence for consumer prices, or monetary policy, at least not yet.” Reality has turned out better than expected, but as that last caveat hints, worries persist. According to the European Central Bank (ECB), European governments’ decision to not retaliate prevented that third inflation “shock”—if they fired back, prices would have risen, spurring inflation. While we agree tariffs would have caused some prices to rise, that isn’t inflation (which is about prices economywide). Inflation is a monetary phenomenon, in which too much money chases a finite amount of goods and services. Absent a spike in money supply—which isn’t happening in Europe or the US—we aren’t likely to see inflation heat up as it did several years ago. So while Europe’s non-retaliation is positive, as is its “series of trade deals with economies around the world, most recently with Indonesia,” that isn’t because of its inflation impact but because tariffs hurt those imposing them more than the target, while trade deals’ benefits are more gradual than most imagine. Lastly, the article reports one ECB rate setter weirdly worries rerouted Chinese exports to Europe will depress prices—which will somehow prove inflationary because of the resulting supply chain disruption. That odd point illustrates why there is no telling how central bankers think about—much less decide—monetary policy. The lingering fear, confusion and doubt on display here shows how sentiment is more depressed across the pond, making it all the easier to beat expectations.

MarketMinder’s View: Well, this article started off promising enough: “The U.S. government shutdown is delaying key economic data releases, thickening the fog of uncertainty for policymakers and businesses, but they needn’t worry. They still have access to one of the best economic indicators: the stock market. That may sound flippant, but the connection between U.S. equity prices, consumer spending and economic growth is strengthening. By some measures, it has never been stronger. This helps explain one of economists’ big ‘misses’ this year: stubbornly resilient U.S. consumption.” As we often say, stocks are the ultimate leading indicator, and we would have just left it at that. But connecting equity prices to spending and economic growth is a bridge too far, as the article ascribes stocks’ prescience to “the powerful, positive feedback loop of gravity-defying strength on Wall Street and consumer spending, the so-called wealth effect,” which leads it awry, concluding “the ‘wealth effect’ is no guarantee of an uninterrupted consumption boom. ... stocks could stop defying gravity.” But are stocks really “defying gravity” and doing something supernatural? We don’t think so. Stocks reflect future earnings, weighing those around 3 to 30 months out against priced-in expectations. What is gravity-defying about earnings hitting record highs and projected to continue doing so against modest, mid-single-digit growth estimates (per FactSet)? That seems reasonable to us, not alarmingly out of whack. As for the wealth effect, that is a myth. Most consumption is out of income and households’ inflation-adjusted income (ex. transfers) is near record levels today, per US Bureau of Economic Analysis data, and trending higher with GDP. Also, while stocks are leading economic indicators, the stock market and GDP aren’t the same thing—equating them here is a bit like comparing apples and oranges.

MarketMinder’s View: This in-depth article details how countries and businesses work around sanctions—a big reason why fears of supply shortages due to government-imposed restrictions are mostly unfounded: “according to current and former officials from several Western countries, including the U.S.: Iranian oil is shipped to China—Tehran’s biggest customer—and, in return, state-backed Chinese companies build infrastructure in Iran. Completing the loop, the officials say, are a Chinese state-owned insurer that calls itself the world’s largest export-credit agency and a Chinese financial entity that is so secretive that its name couldn’t be found on any public list of Chinese banks or financial firms. The arrangement, by sidestepping the international banking system, has provided a lifeline to Iran’s sanctions-squeezed economy. Up to $8.4 billion in oil payments flowed through the funding conduit last year to finance Chinese work on large infrastructure projects in Iran, according to some of the officials.” This is only one example of the lengths buyers and sellers will take to engage in trade, but the under-the-table bargaining here highlights what markets already know: Official statistics don’t always reflect reality, and sanctions (or other trade restrictions) aren’t as airtight as those imposing them might think. Geopolitics aside, this speaks to the resilience of the global economy—something global markets also recognize.