Inflation remains contained. Readings on the Consumer Price Index (CPI) for February were largely as expected. The 1.5% year-over-year increase in the headline figure, which was slightly below consensus expectations, was underpinned by rising energy and food prices. Stripping out those more volatile components, core CPI decelerated last month to +0.1% from January’s +0.2%. Core CPI has hovered around 2% for the bulk of this tightening cycle as quarterly gross domestic product (GDP) growth has averaged slightly above 2%, and we expect slightly higher inflation in 2019 amid a tight U.S. labor market and prospects for moderate output growth, especially if near-term headwinds subside. Still, our expectation for core CPI to be in a range of 2.25-2.50% for 2019 is manageable enough that it won’t force the Federal Reserve’s (Fed) hand into tightening policy further in the near-term.
10-year yield stalls. The 10-year Treasury yield continues to bounce around in a 23-basis point (bp) (0.23%) trading range, which is now the smallest year-to-date trading range since 1974. We see the stall in long-term rates as a clash between steady economic growth and rising inflation expectations on one hand, and higher global demand amid lower yields in other major regions on the other. As political and trade risk dies down, we expect sound economic fundamentals to prevail to lift the 10-year yield slightly higher through the end of the year.
Waking up the yield curve. The Fed heard the market’s alarm and shifted its stance, but the U.S. Treasury yield curve hasn’t woken up yet. The spread between 2-year and 10-year yields has hovered around 15 to 20 bps since the beginning of December, the lowest level since 2007. It’s becoming difficult for investors to see any argument for a steeper curve, but we expect slight steepening through the end of the year, as we’ll explain later today on the LPL Research Blog.
Powell reiterates wait-and-see approach. In two separate appearances over the weekend, Fed Chair Jerome Powell reiterated the central bank’s intent to hold interest rates at current levels as it assesses the global landscape and its potential impact on U.S. growth. He also noted that discussions on ending the wind down of the Fed’s ~$4 trillion balance sheet are well underway with an emphasis on minimizing market disruption and that the process could finish in the fourth quarter this year.
NEW Market Signals podcast. This week’s Market Signals podcast, LPL Financial Chief Investment Strategist John Lynch and Senior Market Strategist Ryan Detrick podcast focus on what to possibly expect from a pullback following the recent stock market rally. Subscribe to the free Market Signals podcast series on iTunes, Google Play, Spotify, or wherever you get your podcasts!
- NFIB Small Business Optimism Index (Feb)
- CPI Report (MoM, Feb)
- UK Industrial Production (Jan)
- Japan PPI Report (Feb)
- PPI report (MoM Feb)
- Duable Goods Orders (Preliminary, MoM, Jan)
- Eurozone Industrial Production (Jan)
- China Industrial Production (Feb)
- China Retail Sales (Feb)
- China Surveyed Jobless Rate (Feb)
- Import Price Index (MoM Feb)
- Export Price Index (MoM Feb)
- Initial Jobless Claims (March 9)
- New Home Sales (MoM Jan)
- Germany CPI Report (Feb)
- Bank of Japan Rate Decision (Mar)
- Industrial Production (MoM Feb)
- JOLTS Job Openings Report (Jan)
- University of Michigan Sentiment Index (Preliminary Mar)
- Eurozone CPI Report (Feb)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
All company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All performance referenced is historical and is no guarantee of future results.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
Index data obtained via FactSet
For Public Use – Tracking # 1-831151 (Exp. 2/20)