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As March economic data continues to be released, the data suggests that economic growth and inflation will increase in Q2 2021.


Our recent posts have been aimed at determining if the weakness in economic data from February and the decline in performance of cyclical and inflation sensitive assets was a sign of a change in the trend that started in November, or if it was just a temporary setback.

The economic data this week continued to point in the direction of a temporary setback.  The ISM Non-Manufacturing PMI for March was released and came in at a record high of 63.7, an 8.4-point increase from February.  The underlying components pointed toward continued strong demand as Business Orders increased by 13.9 points (a record) and New Orders increased by 15.3 points (also a record).  Supply chain shortages remain an issue as supply deliveries increased again to 61.  This has led to increased price pressures and the prices component increased to 74, the highest reading since July 2008. 

Source: Hedgeye.

Source: Hedgeye.

There were other data points confirming supply/demand mismatches leading to higher prices.  The Manheim Used Vehicle Index increased a record 26% year-over-year (y/y) in March.

Source: Hedgeye.

The Producer Price Index (PPI) increased 1% month over month (m/m) in March, which was the second most on record.  On a year over year (y/y) basis, PPI increased by 4.2%.  This is the fastest growth rate since September 2011.  Most of the early gains in PPI were driven by fuel/commodity prices, but Core PPI (excluding Food and Energy) increased by 0.7% m/m and 3.8% y/y.  This is also the fastest growth rate since September 2011. 

From a market signal standpoint, cyclical equities like Financials, Energy, and Materials are consolidating at higher lows, and Industrials are making new highs. 

Source: Koyfin

Source: Koyfin.

Source: Koyfin

Source: Koyfin

The Commodities Index is also consolidating at a higher low, as is the London Metals Index, Oil, and several other commodities. 

Source: Koyfin

Source: Koyfin.

Source: Koyfin.

The U.S. Dollar Index (DXY) has also been consolidating for a few months but is doing so from a multi-year low and a much lower high.  If the dollar were to fail to move out of this consolidation to the upside, that would be a positive for inflation and cyclical/inflation sensitive assets.

Source: Koyfin.

The ongoing March economic data and April market signals continue to support our view that economic growth and inflation will increase in Q2 2021 and that cyclical and inflation sensitive assets should benefit as a result. 

 



 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.