Input Costs are Rising

Yeah, inflation has remained stubbornly low, creating a bit of a conundrum for the Fed. Our view is that, on balance (in terms of the voting members), they'd like to continue nudging rates higher. 

However, not hitting nor holding their 2% inflation target makes it a tough sell. And, frankly, not every member (I said "on balance") is on board with a rate hike at this juncture, regardless. In fact, one or two -- I gather from recent commentary -- would prefer to see the economy run even hotter (inflation somewhere above 2% for a sustained period) before signing onto another quarter-point increase. Gold and bond bulls are aggressively cheering the latter.

But here's the thing, the economy is doing a bit better than okay -- at least that's what our analysis suggests. And if we have our assessment correct, a 2+% inflation reading is indeed in the foreseeable offing. 

Even beyond the generally positive read we're getting from much of the headline data (growth rates of/trends in various data points, summary sentiment readings, etc.), when scratching below the surface we're finding stuff that, again, says inflation and, consequently, interest rates will likely be rising in the not-too-distant future. Which would bode poorly for the bond and gold bulls, and rather well (we presume) for our financials exposure. 

The impact of higher rates on the dollar (it's abysmal performance, by the way, eliminates a rate hike hurdle if the Fed would indeed like to move sooner than later) will be something we'll be monitoring closely (given its implications sector-by-sector) as things develop.

The below, from both the manufacturing and non-manufacturing Institute for Supply Management August surveys, supports our position: 

ISM Manufacturing Survey Commodities Report

Commodities Up in Price
Aluminum (10); Caustic Soda (2); Copper; Corrugate (11); Corrugated Boxes (6); Electric Components (3); Food Ingredients; Lumber (2); Mechanical Components; Memory — Computer (2); Resins; Scrap — All Types; Solvents; Steel; Steel — Hot Rolled (9); and Titanium Dioxide (2).

Commodities Down in Price
Benzene Products.

Commodities in Short Supply
Capacitors (2); Electric Components (3); Electronic Components (6); Integrated Circuits (2); Memory — Computer (2); and Methacrylates.

ISM Non-Manufacturing Survey Commodities Report

Commodities Up in Price

Bacon (3); Chicken Breast; Copper Products; Corrugated Boxes (4); #1 Diesel Fuel (3); #2 Diesel Fuel; Fuel (2); Gasoline; Labor (5); Labor — Construction (6); Lumber Products — Pine, Plywood and Spruce (2); Medical/Surgical Supplies (2); Paper (3); PVC Products; Software; and Steel Products (9). 

Commodities Down in Price

Beef Products; Propane; and Soy Products. 

Commodities in Short Supply

IV Solutions; Labor; Labor — Construction (17); and Medical Supplies (3).

Note: Number in parenthesis represents number of consecutive months listed.