Bonds traded in a tight range this week while stocks ascended in response to muted inflation data, a decline in volatility, and ongoing strong corporate earnings. Even the U.S. pulling out of the Iran nuclear deal and the resulting Israeli-Syrian conflict could not deter the stock market rally.
Small business optimism remains high, which is a good sign for home purchases, especially in states such as California which have a high number of business owners. Oil traded above $70/per barrel supporting a strong economy spurred on by low rates and reduced regulation amongst other geopolitical factors.
While many economists believe wage and consumer inflation will become more of a factor in the not too distant future, key inflation readings came in lighter than expected. Wholesale and consumer inflation readings were tame and included the widely watched CPI readings. All of this helped keep the 10-year Treasury note at or below 3%, even with central bankers continuing to reiterate the need to move short-term rates higher. We will see how long the “so-called Goldilocks” environment can last given that the U.S. is at or near full employment and the economy is running at high capacity levels, both of which should produce meaningful inflation at some point.
It is hard to argue the lower interest rate narrative for the moment absent a black swan event. Therefore, we remain biased toward locking-in interest rates given the potential for higher interest rates globally.