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Central banks get what they want, but is it what investors need?

Michael Santoli
Michael Santoli

“Stock prices dropped Tuesday on signs that central bank policies were working exactly as planned.”

That’s probably not a line you’ll read in any reports on the pullback in European stocks and U.S. index futures this morning. But there is some truth to it, as investors were reacting in part to reports that core inflation in the Eurozone was higher than forecast last month.

The European Central Bank has undertaken its trillion-plus-euro bond-buying program specifically to lift inflation and economic growth and to fend off the threats of deflation and long-term stagnation. When the peppier inflation numbers came out, European government bond yields jumped, as did the euro currency, and stocks backed off.

This is all part of a global adjustment process investors are going through to gauge how effective central bank stimulus efforts have been, and therefore how close they are to being curtailed.

In the U.S., this has been a long and delicate process of Federal Reserve officials trying to ease the markets toward the point where they fully expect, and perhaps welcome, a bump in short-term rates above zero. The May employment data on Friday will have a big say in how this process will go - coming as it will after a decent pickup in things like housing activity, personal income and the ISM manufacturing gauge in recent days.

Of course, it’s not just the inflation story in Europe but the Greek saga that has kept traders off-balance. The handy rule of thumb that says to discount all rumors of an imminent deal remains in place. Government bond yields in so-called peripheral European countries such as Spain are climbing again in one of the Continent’s frequent bouts of concern over creditworthiness and the sanctity of the euro bloc.

Such doubts seem reliably to catch American investor attention only when the market has again calmly trudged toward the upper end of its maddening tight range, as in recent days. Making too much of Greece as an important and enduring catalyst is a definite hazard, but typically sloppy June trading can take hold no matter the excuse.

Other things to watch today include auto sales for May, which are widely forecast to be quite strong, exceeding a 17 million-unit annual rate – not far from an all-time record pace. Here, too, one could report the numbers as central bank policies working precisely as hoped, as plentiful auto financing and cheap leases have been a huge prop to the comeback of the North American car market. Ford will shorten its usual summer shutdown to meet demand for SUVs and pickups. And the Wall Street Journal notes that dollar volume of sales could look even better than the standard units-sold data, as pricier luxury models and trucks speed off the lots in greater quantity.

If there’s a slight puzzle to all this it might be the sluggish action in Ford Motor Co. (F) shares, which are flat this year and have badly underperformed both General Motors Co. (GM) and Fiat Chrysler Automobiles (FCAU). The latter two are considered to have more leverage to change in industry volumes, but Ford’s status as the class of the North American carmakers raises intriguing questions about whether its shares are unjustly maligned.

A final brief mention for the news that privately held Ashley Furniture is considering selling itself for as much as $3 billion. The 45-year-old family business has held its own in a tough industry and feels it might be time to cash in. This is entirely logical and hardly a major warning sign.

But one underappreciated quiet signal of an approaching cycle top in the last bull market was the decision by venerable family businesses to sell, from the Busches of the beer business to the Mars and Wrigley candy clans forming a union. Just a stray observation as we enter what could be a summer of fervid corporate dealmaking.