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.
2017 left investors with a huge challenge as we all move into 2018. After a 21.6% return on the Standard & Poor’s 500 stocks in 2017, do we let the money ride for 2018 or move it into other assets? Some stocks had almost unbelievable years in 2017. Amazon (AMZN) was up 56% for the year an Facebook (FB) climbed 53%. But those gains were left in the dust by the 96% gain on Alibaba (BABA) and the 115% racked up by Tencent Holdings (TCEHY). And even stocks seem to be standing still in comparison to biotech such as Madrigal Pharmaceuticals (MDGL), up 510% in 2017 or Sangamo Therapeutics (SGMO) ahead by 466%. For 2018 should you leave your money in those big winners from last year? Take some of it off the table and put it into laggards? Move some of it to cash?
The U.S. economy added 148,000 net new jobs in December. Economists surveyed by Bloomberg had expected growth of 190,000 jobs. The Bureau of Labor Statistics also revised the November job growth to 252,000 from an initial 228,000. The official unemployment rate remained at 4.1%, the lowest rate since December 2000. The economy has now added an average of 204,000 jobs over the last three months of 2017
If you try to interpret the minutes released today from the Federal Reserve’s December 12-13 meeting without factoring in the departure of key players at the central bank, I think you’ll get the meaning of that meeting exactly wrong. On the surface, the minutes seem to show a Fed with strong reservations about raising interest rates. The presidents of two regional Federal Reserve banks, Neel Kashkari of the Minneapolis Fed and Charles Evans of the Chicago Fed dissented from the decision at that meeting to raised the Fed’s benchmark Fed funds rate by another 25 basis points.
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.
Prices on U.S. Treasuries fell and yields rose for a fifth straight day. The yield on the 10-year U.S. Treasury rose 3 basis points to 2.50%. In the last month the yield on the 10-year Treasury has climbed 13 basis points. The yield on the two-year Treasury is up 11 basis points in the same period.
Neither an interest rate increase from the Federal Reserve nor new limits on the deductibility of mortgage interest deterred home builders in November. Residential construction starts rose 3.3% to a 1.3 million annualized rate, above the 1.26 million (revised downward) rate in October.
I’m not sure I can put together the disparate action of gold, financials, and bonds today. The combination of directions certainly isn’t the conventional one.
No surprise: The Federal Reserve raised its short-term benchmark Fed Funds rate by 25 basis points to a range of 1.25% to 1.50% at today’s meeting. No surprise: The Fed and its outgoing chair Janet Yellen didn’t say anything new. The labor market continues to strengthen and economic growth has been solid. Overall inflation and core inflation have declined this year and are running below the Fed’s target of 2%. But there were surprises in the “dot plot.”
Both Citigroup and JPMorgan Chase are now predicting that average interest rates across the world’s advanced economies will climb to at least 1% in 2018. That might not seem like much, but remember that major economies such as Japan and the European Union now have negative interest rates. Overall the two Wall Street megabanks are telling investors to get ready for the biggest tightening of monetary policy since 2006, before the global financial crisis.
I don’t expect the Federal Reserve to say anything especially revealing abut future interest rates after the Wednesday, December 13, meeting of the Federal Open Market Committee in the last scheduled post-meeting press event of the Janet Yellen Federal Reserve, resolutely stay the rhetorical course. But that likely reticence isn’t stopping economists from moving toward projecting more and faster interest rate increases in 2018.
The Federal Reserve is almost certain to deliver the 25 basis point increase to its short-term interest rate benchmark that everyone expects at its Wednesday, December 13, meeting. The suspense, to the degree there is any, centers on any clues the Federal Reserve might drop as to its thinking about when it will next raise interest rates again and about how many times it will increase interest rates in 2018. I’m not expecting the Fed to say much of anything to give away the game.
