As we ease towards the end of February some of the panic seen earlier in the month has definitely ebbed. The much anticipated CPI print of last week was largely discounted in and markets barely moved in response. The release of the Fed minutes yesterday also indicated that the Fed is more confident in its economic and inflation outlook. All indications are still that there will be rate hike in March, and estimates vary between the need for 3 or 4 throughout 2018. In the minutes, the Fed noted the wage gains evident in the January Employment Report, the rise in CPI as well as the boost that tax reform and fiscal stimulus would provide to the economy.
In response the yield on the US ten year moved to a five year high, while inflation expectations have stopped rising. So there is less delta now in inflation expectations but they remain elevated v. the end of 2017. The steepening yield curve (with both 10 year and 30 year bond yields rising) would seem to be commensurate with expectations of a growing economy, and, indeed, business confidence, is extremely high – particularly in any business associated with international trade is booming – Fed Ex, Boeing, truckers, etc.
Housing construction is also a key growth area as housing starts remain muted and are
significantly below what is required by likely household formations, demand for
second homes and the destruction of homes. Inflation is in evidence everywhere – although some hope that economic growth will spur greater productivity is leading to less fear about the effect of rising wages.
So for now, in February, the glass is half full, but with volatility elevated and memories of the month’s early panic, it is anyone’s guess how the month will end up.