Has anyone noticed that interest rates have been ticking steadily down in the last week? After all of the hoopla about how rising rates has to crush the stock market you would think there would be similar dialogue -- and diatribes -- about how the stock market should climb higher now that we are back below 3% for the 10-year and look like we are headed to 2.75%.
What's happened to move rates down?
Yesterday, we got Fed minutes from the May meeting and the esteemed body agreed that inflation may be transitory and not embedded. I think the Fed might be right.
President Trump, for example, grabs headlines talking about a national defense law as a way to restrict auto imports, which are often subsidized, hurting the profits of U.S. automakers and therefore their ability to hire. I find the logic spurious. But I understand it because we are now seeing cars and more important, used cars. come down in price because of a surge in first-quarter imports. That may be bad for General Motors (GM) and Ford (F) , but the glut has turned very deflationary.
Second, the Saudis and the Russians are talking right now about scrapping their caps on oil production that they put into place in 2017 to stabilize crude. Those caps, plus a decline in drilling by several key OPEC and non-OPEC nations, have caused oil to soar. The prospect of oil rolling over because of greater production by the Saudis and the Russians, again, is incredibly deflationary.
Remember, plastic, the key escalating raw cost for all consumer-packaged goods companies besides freight -- more on that in a second -- is priced off of oil, so it would go down, too, helping the margins of these producers but also bringing down prices to the consumer.
What else could explain the bond rally? The World Trade Organization's Dispute Settlement Body could soon rule against the U.S. in the duties our country slapped on Canadian lumber. Two months ago, the Canadians got approval for two different panels to look into the tariffs that caused our lumber prices to skyrocket more than 30% to record levels.
The last few days have felt "peakish," meaning that lumber's had a parabolic spike of unsustainable proportions and I think it's about to be repealed. Watch the stock of Weyerhaeuser (WY) as its trajectory will tell the tale. Lumber has added $7,000 to the average price of a home because of the ruling. A pro-Canada ruling could be a big win for the anti-inflationistas.
We keep hearing about escalating freight costs, but a lot of the freight issues had to do with the rails not being ready for the spike in demand. If you consider that Union Pacific (UNP) just pulled 650 locomotives out of storage and CSX (CSX) is ramping up for more traffic, you could see a peak in transportation costs. It isn't like the truckers are sitting still, either. They are struggling to find drivers; it's a major bottleneck, but if they pay bonuses like Union Pacific is doing to find workers -- $10,000 to $25,000 -- the shortage will be alleviated and freight costs will come down. Immigration would help, but the doors have been shut and the government's aggressively deporting illegals. That's inflationary but President Trump's not going to bend on a key campaign issue.
How about aluminum and steel tariffs, the big reasons for escalating can prices? We are not going to see a decline any time soon, particularly with the latter, because we don't make enough aluminum in this country and the tariff was really ill-considered. But steel giant Nucor (NUE) is taking advantage of the new prices by building new plants and operating its factories in overdrive. Steel could peak if the exporters to this country keep shipping here despite the tariffs as their cost of capital is often incredibly low because of state subsidies. That hasn't yet happened.
Still, let's not forget what comes up can come down. Many industries are just beginning to train historically less desirable unemployed workers to try to keep pay costs in line. Because of mandated minimum wages and scarcity of all sorts of workers with key skillsets, it's a real issue. However, it's not so real as to keep the pressure on rates going higher.
So, don't stop fretting about inflation, but understand, barring endless tariffs by the president, it is anything but permanent and the decline in rates is hugely positive for the stock market, something we forget on a day like today.
-- This is an updated version of a column that originally appeared on Real Money at 6:59 a.m.
