Market Commentary 9/1/17

The combination of soft inflation data and a weaker than expected August jobs report continues to keep bond yields lower for longer.

Inflation, or the lack thereof, has been a conundrum to many economists. Increased consumer spending and an overall healthy job market usually lead to rising inflation, though this has not been the case during this past economic expansion. This lack of inflation may very well limit the Fed’s ability to raise short-term interest rates this fall. The Fed has raised short-term interest rates twice so far this year. A third increase is anyone’s guess at the moment, but soft inflation data does support keeping interest rates steady as the economy does not seem to be overheating.

The August unemployment data were disappointing. The Unemployment Rate ticked up to 4.4% from 4.3%. Within the numbers, it showed that both the U6 number and the Labor Force Participation Rate were unchanged at 62.9% and 8.6%, respectively. The conclusion from this report is that the labor market is healthy, but not as strong as expected.

With the 10-year Treasury note under 2.20%, we remain biased toward locking-in interest rates as both short-term and long term interest rates remain attractive.