Stocks rallied Wednesday as investors cheered much better-than-expected ADP jobs report. However, the market for now is choosing to ignore the big miss on the ISM Non-manufacturing report. The headline composite slowed to a 5-month low of 55.2. And, in sharp contrast to the ADP figure, employment growth fell 3.6 points to 51.6, which is a 7-month low.
There are many other things the market is choosing to ignore as it rallies around high hopes for President Trump's pro business agenda.
The election of the 45th president brought with it great enthusiasm for the U.S. economy to break out of its eight-year growth malaise and to provide it with a huge adrenaline shot of inflation. But the optimism behind Trump's economic agenda took a serious blow with the inability of House Republicans to even get a vote on repealing and replacing Obamacare.
According to current investor sentiment, supplanting the "Unaffordable Care Act" would expedite the passage of tax cuts and infrastructure spending, which would lead to a significant boost in GDP and inflation. This would in turn help to justify the incredibly large gap between stock prices and the actual economy.
What's most amazing is Wall Street and government's infatuation with inflation. After all, the Fed does not have a specific GDP target; but it does have an actual inflation target of 2 percent. And if Trump's largess led to a huge increase in deficits, which would have to be monetized by the Fed, that would lead to an increase in the rate of inflation.
But, with Trumponomics getting stuck in the mire of D.C. politics, investors are vastly overestimating the chances of significant tax cuts and infrastructure spending anytime soon—if at all.
Inflation occurs when the market determines that the purchasing power of a currency is going to fall. In other words, consumers and investors agree that the money supply will be diluted and will lose its value. This occurs when a central bank directly monetizes assets, or when private banks flood the market with new loans.
With this in mind, let's take a look at the chart of Commercial and Industrial Loan growth.