Market Commentary 12/15/17

With unemployment at 4.10% juxtaposed against low wage and consumer inflation readings, the Federal Open Market Committee (FOMC) made good on its promise to raise rates in 2017 with its second rate hike. The overnight lending rate, known as the federal funds rate, increased to 1.25% -1.500%, and was increased by .25%. Government expectations are for a growing economy in 2018 which may be amplified with the Republican Tax Reform Plan which is just about finalized. The conundrum remains that while inflations is beginning to show signs of increasing here and in Europe, it still remains persistently below the Fed’s 2% target. Soft inflation data has been a boon for bonds. As we have written previously, should inflation data heat up, you should be prepared for a quick rise in interest rates both domestically and internationally.

Bonds traded well this week even in the face of a roaring stock market, pro-business tax cuts, and an increase in lending rates. One reason was the benign comments out of the FOMC and Federal Reserve Chair Yellen on the path to normalizing interest rates – slowly and carefully.

With the 10-year trading in the 2.300% to 2.400% range in light of the many positive factors including tax reform, strong corporate earnings and global synchronized economic growth, we remain biased toward locking in interest rates at current levels.