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Manufacturing and inflation — What you need to know in markets on Wednesday

Myles Udland
Markets Reporter

March will kick off with markets digesting President Donald Trump’s first address before a joint session of Congress on Tuesday night.

We argue here that markets, which have been inclined to give the President the benefit of the doubt when it comes to the timeline — and details — of his major economic initiatives, aren’t likely to be inclined to make major moves based on what Trump says. So we’ll see.

As for Wednesday, the calendar is quite busy with the Federal Reserve’s preferred inflation measure, two readings on US manufacturing, auto sales, and the Fed’s Beige Book report due out.

At 8:30 a.m. ET, the personal income and spending report will be released, but the big number in here will be the “core” PCE reading, the Fed’s preferred measure of inflation, which is expected to show prices rose 1.7% over last year, still below the Fed’s 2% target.

As of Tuesday, interest rate markets were pricing in about a 50% chance of the Fed raising rates at its March meeting in two weeks. On Friday, we’ll hear from Fed Chair Janet Yellen, which could give investors more clues as to the Fed’s plans later in March and for the balance of the year.

Elsewhere in data, both Markit Economics and the Institute for Supply Management will release manufacturing survey results on Wednesday, which markets expect to continue the recent streak of strong survey data since the presidential election.

On Tuesday, the Conference Board’s latest reading of consumer confidence beat expectations, continuing this trend of stronger-than-expected “soft data.” But as the following chart from Deutsche Bank’s Torsten Sløk shows, expectations for hard data — think retail sales and GDP, among other figures — still haven’t picked up. On Tuesday, the second estimate of fourth quarter GDP disappointed.

Growth expectations are basically the same they were before the election.

On Wednesday afternoon, we’ll also get the latest Beige Book from the Federal Reserve, a collection of economic anecdotes from each of the Fed’s 12 districts which outlines the Fed’s discussion of the economy likely to take place at its two-day FOMC meeting, set to kick off on March 14.

Fees

Stuff is getting cheaper on Wall Street.

Not stocks, at least when valued on a price-to-earnings basis, but the cost you pay to invest in stocks (and other things).

This week, both Fidelity and Charles Schwab (SCHW) have cut commissions on U.S. stocks and ETFs to $4.95 per trade. And last week, Bloomberg reported that Vanguard cut expense ratios on 68 ETFs and mutual funds, its third such move since December.

The most interesting news on the fees front, however, was a report from the Wall Street Journal that legendary hedge fund investor Paul Tudor Jones would cut his management fees to 1.75% of assets under management and 20% of profits.

In his latest letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders, Warren Buffett railed against the hedge fund industry (again!), writing that, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

The standard “2 and 20” structure enjoyed by the hedge fund industry — charging a 2% fee on assets under management and a 20% cut of profits — in Buffett’s view makes the ability for investors to really get what they’re looking for, which is market beating performance, almost impossible. This is not, of course, a particularly novel view.

As we wrote over the weekend, Buffett praised Vanguard founder Jack Bogle as a “hero” for giving investors wide access to cheap investment options. And while many have seen the rise of Vanguard’s assets under management as a sign of investors crowding into passive investment strategies, this divide is really about cheap versus expensive investment choices.

Active implies investors — or, more specifically, fund managers — making changes to a portfolio simply for the sake of change. Passive implies that investors are simply lemmings, sitting back and doing nothing while potentially losing money. Recall that over the summer Bernstein analyst Inigo Fraser-Jenkins wrote that the rise of passive investing could have worse outcomes than Marxism.

But Buffett’s discussion of the issue in his latest letter re-focuses the “active vs. passive” debate towards one that is more productive and captures what “active vs. passive” really means. This debate is not about how you invest but how much it costs for you to invest.

 And the irony, of course, is that the reason it is now so cheap for the average person to invest, regardless of the style they hope to pursue, is because of capitalism.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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