This week saw another powerful equities market rally as the prospects of a U.S. tax cut, synchronized global growth, and low-inflation boosted equities higher. Bonds suffered a bit as interest yields for mortgage rates and government debt rose. While there are signals that inflation may be brewing, the Federal Reserve’s preferred measure of inflation, personal consumption expenditures price index (PCE), continues to run below its 2% target, and is a main reason that yields have not jolted higher.
The big news this week was the tax overhaul which is likely to pass before Christmas. The proposed tax reform will benefit corporations and earnings, and is one of the main reasons our stock market is roaring higher. The added fuel of these tax cuts on top of an improving economy should pressure bonds to rise at some point. There are simply too many positive economic factors at work, including unemployment at 4.00%, tighter employment pool of skilled workers, high real estate and equity valuations, and finally, strong signals from the Federal Reserve that it is now time to attempt to normalize interest rates. However, higher mortgage interest rates can be supported in a growing and robust economy combined with overall lower tax rates.
With the 10-year U.S. Treasury near 2.400%, we remain biased toward locking in interest rates given the many positive economic readings that we are seeing.