Weekly Market Commentary January 16, 2018

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Global stock markets continued their blazing 2018 pace. The S&P 500 climbed another 1.6% and is now up 4.2% for the year. Global stocks participated in the rally as the MSCI ACWI rose 1.2%. The Bloomberg BarCap Aggregate Bond Index slid 0.2% last week and is down 0.5% for the year. The risk-on approach by investors and greater optimism about the economy have pushed rates higher.

Our Weekly Take

The Federal Reserve has raised rates four times in the last 14 months. These hikes occurred even though inflation (as measured by the PCE Price Index) remained below the Fed’s 2% target for nearly all of 2017. Fed governors expect an additional three hikes in 2018. The Fed has shown concern that leaving rates at very low levels could create financial distortions and raise the risk of major market declines. Very low rates may not affect economic growth, but they encourage leverage and financial risk-taking. Given the stock market’s performance, there is little need to encourage investors to take more risk.

 Key points for the week

  • U.S. consumer prices increased by 0.3% in December.
  • U.S. debt yields are increasing as higher inflation is expected.
  • Fed will continue hiking to control inflation and financial risk-taking.

What are we reading?

Below are some areas of the market we paid particularly close attention to this week. For further information, we encourage our readers to follow the links.

US core consumer prices post biggest gain in 11 months

U.S. consumer prices rose by 0.3% in December — the second sharpest increase in 2017. The main contributors to the gain were increased rental and health care costs. The tightening labor market and rising commodity prices paired with a weak dollar are leading economists to believe inflation will reach the Fed’s 2% target for 2018.

Bond yields on the rise

U.S. debt yields rose in response to higher consumer prices. The two-year Treasury yield finally reached 2%, which is the highest level it’s seen since 2008. These increases indicate future outlooks are changing as inflation is expected to be higher this year than last. Long-term rates have also been increasing, but at a slower rate. If long-term rates start increasing more rapidly, interest rates on mortgages will move higher, too.

Fun story of the week

Why Costco Will Never Raise the Price of Rotisserie Chicken

The electronics section at Walmart is the most popular area in the store — and that is why it’s located at the back, so shoppers have to pass through aisles of other goods to get there. For the grocery store industry, rotisserie chicken is the electronics section. The smell and cheap price of rotisserie chicken lures customers in, enticing them to pick up extra items. So, even though the price of chicken has increased, Costco keeps its rotisserie chicken marked at $4.99. The wholesale giant prefers to reduce costs rather than raise prices. Who knew chicken could be such a draw?


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