Daily Market Color

Economic Growth Seen in Data, Bond Selloff Continues With Hawkish Rate Outlook

Continued Strength in Economic Data     Today investors received a bevy of new data that displayed healthy growth in the labor, housing, and manufacturing markets.  Consumer prices rose for the fourth consecutive month, recording a 0.2% MoM gain that was in-line with expectations.  Headline inflation increased 1.7% YoY, its highest rise since October 2014, with the jump mainly attributed to a recovery in energy prices.  Stripping out food and energy, core inflation registered a 0.2% gain in November with a 0.29% MoM uptick in housing prices contributing a significant portion to the rise while a fall in hotel prices (-0.14%) weighed down the figure.  Further adding to the strength in housing, the National Association of Homebuilders’ index hit an 11-year high in December at 70, with the Western region generating the majority of the momentum.  Hopes for reduced regulations that would serve to benefit small businesses and housing affordability have been identified as the main driver behind the increase.  Other data released today included initial jobless claims, which showed a 4,000 weekly drop in claims to 254,000 as the labor market remains at strong levels, supporting several comments made by the Fed in yesterday’s statement.  In the factory sector, the PMI Manufacturing Index recorded its strongest reading since March 2015 at 54.2  Highlighted in the report, inventories grew at the fastest pace on record while new orders rose but at a slower pace than previous months, as weak foreign sales hindered the bottom line.

Bonds Resume Selloff, Dollar Rallies on Rate Outlook
Yesterday’s bond selloff triggered by the hawkish comments made by the Fed carried on overnight and into today’s NY session, as Treasury yields/swap rates increased an additional 2-7 bps across major maturities.  The yield on the 10-year Treasury note rose above 2.6% to its highest level in more than two years, capping a two-day increase of 10bps.  Also benefitting from the expected faster pace of future rate hikes, the US dollar rose to a 13-year high against the euro, gaining 1.2% to $1.0415 per euro.  With the Federal Reserve seemingly the only central bank around the world intent on tightening monetary policy near term, investors have grown increasingly attracted to the greenback.  In addition to the euro, the dollar gained 1.1% against the British pound and 1.2% vs. the Japanese yen.  All three major US stock indices increased 0.3%-0.4% on the day, while the price of crude oil fluctuated throughout the session before settling just above even for the day with WTI at $51/barrel and Brent at $54.2/barrel.


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