The FOMC is sitting on the fence. The Trump administration may struggle to deliver on some campaign promises. However, the key to higher equity valuations lies in the ability of the US economy to deliver growth without creating inflation.
The retail sales data were strong last week, but online spending continues to rise sharply, up 13.0% y/y in February. E-commerce is disinflationary. Core inflation fell back last month, led by declines in durable and non-durable goods components. Job openings rebounded in January and voluntary quits hit new highs. Quits have been an important indicator for Ms Yellen in recent years. Nonetheless, the relationship between quits and key measures of wage inflation has weakened. Profit margins are unlikely to be squeezed.
Non-labour costs have also been trending sideways throughout the long recovery according to the BLS, a contrast with the previous two economic cycles. The encouraging survey data is not just a function of President Trump’s election victory. The ability to control costs allows companies to innovate, scale-up and create jobs. This is reflected in the strong employment indices of recent surveys: the future employment index in the Philadelphia Fed survey is just below the 33-year high in January. The recovery has enough momentum to withstand any delay to the Trump stimulus.
Summary
- Job openings and Philadelphia Fed suggest hiring will remain solid
- CPI data show how margins may not be squeezed by long economic expansion
- Retail sales data very firm, but again, not inflationary
