The Market Today
2017 – Long Yields Unchanged; Stocks up 30%; Unemployment Down to 4.1% but Inflation Slower; and Tax Reform
by Craig Dismuke, Dudley Carter
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2017 – A Year to Remember: Last year certainly proved to be an interesting one – for U.S. politics, the economy, and the markets. President Trump’s election flipped the apple cart in Washington and “unexpected” became theme for his first year in office. One can certainly add Washington passing massive tax reform to the “unexpected” category. The economy, with one quarter of data still outstanding, appears to have had its best calendar year of this cycle. But despite the unemployment rate dropping from 4.7 to 4.1%, earnings growth and inflation remained tame. As for the markets, stocks had their least volatile year since the 1920s but the Dow, S&P, and Nasdaq set 205 new record-high closes, cumulatively. The 10-year Treasury yield traded within a 57 bps range all year, making 2017 the second-least volatile year since 1965. And the 10-year yield ended within 5 bps of where the year started. For a full review of 2017, please see our 2017 Year-in-Review video here.
This Week’s Calendar – Busy Start to 2018: The first week of 2018 is loaded with important economic data. We’ll see reports on construction spending, auto sales, the ISM manufacturing and non-manufacturing indices, external trade, business investment, and the trade balance. However, the biggest news will come in Friday’s labor reports for December. Nonfarm payrolls are expected to have expanded 189k and the unemployment rate to have held at 4.1%. However, given the seasonal volatility in December’s payroll reports, we’ll take any big divergence from expectations with a grain of salt.
Overnight Activity – Sovereign Yields Climb to Start the New Year: Sovereign yields are up to start 2018 and most global curves are steeper on the moves. European yields are leading after the final release confirmed last week’s preliminary report showing the Eurozone’s manufacturing PMI at its highest reading since the series began. Also grabbing the attention of investors and adding to the upward pressure on yields were some hawkish remarks over the weekend from an ECB official. ECB Board Member Coeure told a Chinese news outlet that the ECB could forego extending its QE program past September. Coeure said, “Given what we see in the economy, I believe that there is a reasonable chance that the extension of our asset purchase program decided in October can be the last.” The German 10-year yield was up 2.4 bps, the U.K. 10-year yield was 6.3 bps higher, and the Italian 10-year yield has risen 6.3 bps. The U.S. 10-year yield added 2.0 bps while the 2-year yield increased 1.6 bps. The overnight rise in yields hasn’t been derailed by a mixed start for global equities. Asian markets were mostly higher Tuesday – many remained closed for various holidays – after a positive PMI from China but European equities have split lower. U.S. equity futures are up strongly pointing to a recovery from last Friday’s late-afternoon selling that ended a strong 2017 on a disappointing note. One thing that hasn’t changed with the turn of the year is the downtrend in the dollar. The currency is the weakest of the majors to start the year and at its lowest level since mid-September.