End Of The Streak- Stocks Still Overbought

inflation Looking Like It Might Increase

We've discussed that the inflation rate should increase in 2018. The 10 year break even inflation rate recently rose to 2.05%. As you can see from the chart below, the year over year core CPI has some correlation with the year over import prices and the dollar index. Import prices for consumer goods went from a source of deflation to one of inflation. The dollar index is advanced 4 months ahead showing its recent correction might mean the core CPI will increase. The December CPI report will be released on Friday. The expectation is for a 2.1% increase year over year which would be a decline from the 2.2% growth in November. The core CPI is expected to increase 1.7% year over year which would be flat with November. I am looking for it to beat expectations.

Commodity Pressures Usually Cause Problems

It's funny to see investors keying off the Fed by complaining about low inflation. These low commodity prices have been the fuel for the rally in the past 2 years. The chart below shows the commodity prices compared with recessions. As you can see, when they spike, it's bad news for the economy. This cycle is slightly different because some regions benefit from high oil prices because of the fracking boom in America. We might be seeing the benefits of balance economy because consumer spending was helped by the oil crash, but the energy sector was killed. Now energy firms are benefiting from higher oil prices which will start to hurt the consumer. If the labor market brings wage growth partially because of the improvement from the energy sector, the consumer will probably be able to handle the increases.