Bonds are set to close out the week nearly unchanged. The stock market strung together a couple of good trading days even against the background noise of Trump’s healthcare reform getting punted. To date, the stock market remains resilient even in light of the failure of Trump’s administration to pass his pre-election promise of healthcare reform.
Currently, the stock market is trading higher on the assumption that tax reform will pass. If Congress does not approve Trump’s tax reform proposals, expect interest rates to move lower and the stock market will likely become increasingly volatile.
In economic news, inflation remains in check just below the Fed’s target range. The Core PCE, the Fed’s favorite inflation gauge, rose 1.8% year-over-year in February from 1.7% in January and sits just below the 2% target range. The Fed has intimated that it is comfortable with Core PCE reaching or, exceeding the 2% target rate. If inflation stalls here, it will be tough for the Fed to justify hiking rates since that tactic is typically used to stave off inflation. Only time will tell where rates go from here. There is momentum for higher interest rates although we can envision several arguments for lower interest rates based on the current state of global and geopolitical conditions, ie. Brexit, North Korea, a potential recession, etc.
The current state of the economy might suggest locking in interest rates, but we remain slightly biased toward floating rates at these levels and watching to see if the important 10-year U.S. Treasury note will touch down to 2.25% or if it will move higher above 2.500%.