U.S. equity markets had a very volatile week. The bond market also saw increased volatility, with the 10-year Treasury bond yield up to 2.84 percent by Friday morning. The recent spate of financial market volatility will not materially impede U.S. economic momentum in the near term. But it is a clear signal that the world is changing in fundamental ways. We expect to see ongoing central bank monetary policy normalization this year and next, which will put upward pressure on bond yields.
Bank of England Governor Mark Carney hinted this week that the BOE will raise interest rates “somewhat earlier” than previously expected, possibly as early as May. The UK is highly exposed to import price inflation that can be amplified through exchange rate fluctuations.
President Trump has signed a two-year budget deal boosting federal defense and non-defense spending by $300 billion, with an extra $90 billion for federal disaster relief. The spending bill suspends the debt limit until March 2019. It also includes short term funding through March 23, buying Congress a few more weeks to finalize the budget for the current fiscal year, which runs through September. The new budget is expected to add about $265 billion to the federal debt over two years, requiring the U.S. Treasury to issue more bonds, putting upward pressure on Treasury bond yields.
The ISM Non-Manufacturing Index for January increased to a strong 59.9 percent, showing ongoing momentum for the U.S. economy. Fifteen out of 18 industries reported expansion for the month. Three reported contraction. Anecdotal comments were positive.
Labor data looks good. The Job Openings and Labor Turnover Survey showed a slight dip in the job openings rate in December, to a still-strong level. The hiring rate was unchanged. Initial claims for unemployment insurance fell by 9,000, to hit 221,000 for the week ending February 3. Continuing claims fell by 33,000, to hit 1,923,000 for the week ending January 27. These very low levels for claims bolster our view that the tight job market will put upward pressure on wages this year.
The rate for a 30-year fixed rate mortgage increased to 4.50 percent for the week ending February 2, according to the Mortgage Bankers Association. Mortgage apps for purchase fell in late January and were unchanged in early February. Increasing mortgage rates will reduce housing affordability, along with strong house price gains.
The U.S. international trade gap widened by $2.7 billion in December, to $53.1 billion. This will initiate a small downward adjustment to Q4 real GDP growth if all other components are unchanged in the second estimate.
In Fed news, Marvin Goodfriend, from Carnegie Mellon University, was approved by the Senate Banking Committee for a seat on the Fed’s Board of Governors. Goodfriend still faces a full confirmation vote in the Senate where he faces some opposition.
The implied odds of a March 21 fed funds rate hike have eased to about 72 percent.
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