Ahead of congressional testimony tomorrow by new Federal Reserve Chairman Jerome Powell, Wall Street is buzzing with speculation that the Powell Fed will be willing let inflation run higher than its current target of 2%. Maybe as high as 2.5%.
As of yesterday the Standard & Poor’s 500 stock index has climbed 5.8% in the last five trading sessions. That recouped much of the 9.03% drop (not quite an official correction of 10% or more) from January 26 through Februry 8. Which, of course, raises the question of what lies ahead–A rapid climb back through the old high of 2872.87 to new records (a classic V-recovery) or a move back to near the old high, followed by a failure at that level and a deeper correction of, say, 15%?
Headline CPI (Consumer Price Index) inflation climbed 0.5% in January, the Labor Department announced today. That was above the 0.4% increase expected by economists surveyed by Briefing.com. Core CPI, which excludes more volatile food and energy prices, climbed 0.3% in January. Economists surveyed by Briefing.com had expected a 0.2% increase.
Today Goldman Sachs projected that the yield on the Treasury 10-year note will climb as high as 3.5% in the next six months. In addition, the Wall Street giant told Bloomberg, the U.S. Federal Reserve will raise rates four times in 2018. The yield on the 10-year Treasury finished at 2.85% yesterday after trading as high as 2.89%, a four-year high.
Notice that the signing of a bill early this morning to keep the government open and to fund operations for two years hasn’t resulted in a serious rally in either stocks or bonds. And mind you, this deal also “solves” the debt ceiling crisis by suspending the debt ceiling until March 2019. That passes for statesman-like foresight in Washington these days and this certainly counts as good news. So why no big upside move on these events?
Positive economic data today–for the short term. But some troubling longer term trends continue. Initial claims for unemployment fell more than expected to 230,000 for the week ended January 27 versus expectations for 238,000 initial claims among economists. On the positive side as well, the ISM Manufacturing Index came in at 59.1 for January against an expected 58.5 reading
The first read on growth in the U.S. economy during the fourth quarter was a tad disappointing. GDP increased by 2.6% year over year in the fourth quarter. Economists surveyed by Briefing.com were looking for growth of 2.9%. In the third quarter of 2017 GDP grew at a year over year rate of 3.2% after all the revisions were in.
Treasury Secretary Steve Mnuchin gave the markets a green light to push the U.S. dollar lower in remarks at Davos. Currency traders, already on board the lower-dollar train, didn’t waste time before pushing the throttle. The Dollar Spot Index (DXY) is down 0.86% as of noon New York time to 89.347. Traders have been eyeing the 90 level on the index to see whether support would hold at this level or if the index would break below 90 and set up a move lower.
The International Monetary Fund (IMF) raised its forecast for world economic growth in 2018 to 3.9%. That’s a 0.2 percentage point increase from its October projection and the fastest growth rate since 2011. About half of the improvement in the forecast is a result of the U.S. Tax Cuts and Jobs act passed in December. The IMF raised its forecast for U.S. growth in 2018 by 0.4 percentage points to 2.7%. That’s the fastest forecast growth among developed economies.
2017 was a tough year for benchmarking my Dividend Portfolio. For the year the total price appreciation on the stocks in the portfolio was 3.4% The 21.64% return on the Standard & Poor’s 500 crushed that. The dividend yield on the portfolio for the year came to 3.11%. Which beat the 2.8% total return from holding 10-year Treasury bonds for 2017. The total return on my Dividend Portfolio for 2017 was 6.48%.
The yield on the 10-year U.S. Treasury climbed 7 basis points today to 2.55%. That’s the highest yield since March. That prompted bond guru Bill Gross to declare that we have entered a confirmed bear market in bonds with the upward trend lines of 25 years broken for 5-and 10-year Treasuries.
The global economy just keeps on running in high gear. For the United States, today the ISM Manufacturing Index climbed to 59.7 for December, well above the 58.2 in November. (Economists surveyed by Bloomberg had expected a reading of 58.2 as well. In this index anything above 50 indicates that a sector is expanding.) This puts the index at the highest level in three months.
