March 3, 2017

The major stock market averages opened lower this morning (Dow -32 pts; SPX -.14%). Biotechs and banks are up modestly, but the rest of the landscape is flat to down. The VIX Index sank back down to 11.3 today; there really isn’t much fear among investors at the moment. The dollar is weaker and commodities are mixed. Gold is down today but up about 6% so far this year. WTI crude oil is up 1% to trade around $53.20/barrel. Bonds are lower pretty much across the board. The 5- and 10-year Treasury yields shot up to 2.05% and 2.51%, respectively. Those yields are at 2-month highs. The 2-year Treasury, which closely follows Federal Reserve rate hike expectations, has jumped to its highest level since late 2008. 

The prospect of another Fed rate hike later this month highlights the fact that bonds have generally been retreating for the better part of a year. A popular long-term Treasury bond fund, iShares 20+ Year Treasury ETF (TLT), is down 8% over the last 12 months. In the prior 24 months, however, TLT shot up 18%. The bond market has been rallying since 1982, but there are signs that we’ve hit an inflection point. Wall Street consensus holds that the Fed will raise its short-term policy interest rate 3 times this year. But of course, that’s dependent on whether the economy continues to accelerate. At the moment, the Fed forecasts US GDP will rise to 2.3% this year from 1.6% last year. Fed Chair Janet Yellen is scheduled to discuss her economic outlook today in Chicago. 

ISM’s non-manufacturing business activity index soared to 57.6 last month—the highest level since October 2015. Service sector businesses are expanding, and that means the economy is gaining momentum. This index is essentially a survey of business leaders, who have been increasingly optimistic since the election. Bloomberg’s take, however, is that “hard” data, such as industrial production, durable goods orders and exports, haven’t shown the same strength as survey data. “The elevated level of the index implies that private-sector businesses are enthusiastic about the prospects of tax reform and deregulation, but their sentiment is not translating into action…until more details become available.”  

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