Closing Thoughts for the Week

Last week serves as a reminder of how the macro forces that have been building over the past several quarters, including inflation, interest rates and geopolitics, may finally be suggesting that an economic deceleration is upon us. On Friday, the markets reacted with a decidedly risk-off turn. The situation in Japan warrants continued monitoring with the country’s inflation rate hitting 4% in January.

There were two pieces of news this past week that I really think set a potentially negative tone for the weeks ahead. It looks like the inflation rate could hold steady around this level for the next few months before rising again starting around May. If retail sales start breaking down, the economy may not have much left holding it up. U.S. stocks have remained remarkably steady throughout what’s becoming a more volatile environment both politically and economically.

We’re starting to see real evidence of labor weakness in the manufacturing space. The University of Michigan consumer sentiment report isn’t usually a market mover, but February’s report revealed some potentially important trends. There are signs here that investors are starting to prepare themselves for inflation and sentiment readings seem to confirm that. The markets should also be back on yen watch here.