MARTS MAY SUFFER MORE VOLATILITY

2 important readings on US inflation this week to help determine whether uncertainty remains on horizon

THE inflation bogeyman has reared its ugly head and sent United States stock investors racing for the hills in recent days. This week, coming off one of the most volatile stretches in years, two important readings on US inflation could help determine whether the stock market begins to settle or if another bout of volatility is in store.

If last month’s consumer price index (CPI), due on Wednesday from the US Labour Department, and the Producer Price Index the next day, come in higher than the market anticipates, brace for more selling and gyrations for stocks.

US consumer prices rose 2.1 per cent year-on-year in December and is forecast to stay around that pace this month.

“If we get a hot CPI print it will insert additional uncertainty, but if we get a quiet, below-consensus print, you may see yields down and equities rally,” said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.

The equity market has become highly sensitive to inflation this month.

A selloff in US stocks earlier last week was in large part sparked by the February 2 monthly US employment report, which showed the largest yearon-year rise in average hourly earnings since June 2009.

Recent US tax cuts that may spur economic growth, the prospect of more government borrowing to fund a widening fiscal deficit and rising wages have all pushed up US Treasury yields to near four-year highs.

The jump in wage inflation pushed yields on the benchmark 10-year US Treasury note closer to the three per cent mark last seen four years ago, denting the attractiveness of equities, and unnerving investors fearful inflation will force the Federal Reserve (Fed) to raises short term interest rates at a faster pace than is currently priced into the market.

The current earnings yield for the S&P 500 index companies stands at 5.4 per cent, below the 6.4 per cent average of the past 20 years.

As bond yields rise the spread between the two narrows, prompting asset allocation changes between equities and fixed income.

Investor concerns over inflation was reflected in Lipper funds data on Thursday, which showed US-based inflation-protected bond funds attracted US$859 million (RM3.39 billion) over the weekly period, the largest inflows since November 2016.

On Thursday, New York Fed president William Dudley said the central bank’s forecast of three rate hikes still seemed a “very reasonable projection” but added there was a potential for

The Dow currently has an average intraday swing over the past 50 days of 265.76 points, the highest since March 2016.

While volatility had subsided a little from the heights touched earlier in the week, it was far from an all clear, said Nigol Koulajian, chief executive of Quest Partners, a systematic commodity trading adviser with US$1.4 billion in assets under management, here.

Koulajian pointed to the fixed income market as the main catalyst right now for near-term moves in the stock market.

But analysts also caution yields are not at levels that should be alarming to investors, and in fact are at levels that signal a healthier global economy, and the performance of some stocks last week pointed to a belief the consumer was also getting healthier.

The average yield on the 10year Treasury note over the past 30 years is 4.834 per cent, still above current levels.