Daily Market Color February 1, 2017Fed Holds Rates Steady, Economic Data Impresses as Treasury Yields Edge Higher Jeff Davenport Federal Reserve Leaves Policy Unchanged Today marked the conclusion of the Fed’s first policy meeting of 2017, with the unanimous decision being made to hold the target benchmark rate steady at its current 50 bps – 75 bps range. In the absence of a press conference afterwards, investors parsed through the Fed’s official statement, finding little new guidance as to when the next rate hike may occur. A “gradual” pace of increases was again referenced, noting that there lacked sufficient new economic developments to alter its current path. With regard to its dual mandate, Fed officials stated “inflation increased in recent quarters but is still below the committee’s 2 percent longer-run objective,” and provided their expectations that “inflation will rise to 2% over the medium term.” Additionally, the statement confirmed that payroll additions “remained solid” as the unemployment rate “stayed near its recent low.” As it relates to consumer confidence in recent months, it was noted that “measures of consumer and business sentiment have improved of late.” No mention of fiscal policy or proposals from the Trump administration were referenced in the statement. The current probability for a rate hike by the Federal Reserve at its next meeting in March stands at 32% – up marginally from the probability for a rate hike pre-FOMC release. Manufacturing, Private Jobs Data Exceed Expectations As reported by the Institute for Supply Management, last month US factory activity advanced at its fastest pace since November 2014. The ISM manufacturing index increased to 56.0 in January, up 1.5 points from a revised December level and higher than expectations of 55.0. Growth in manufacturing has now increased for the fifth consecutive month, led by two-year highs in both production and new orders. Prices of raw materials also grew for the 11th straight month, adding to inflationary pressures amid rising energy prices and consumer confidence. In a separate report, the number of private payrolls increased by 246,000 last month, surpassing median forecasts of +168,000 and significantly improving from December’s +151,000 reading. Payroll addition in goods-producing sectors totaled 46,000, a two-year high. Often an indicator for the Labor Department’s more comprehensive employment report, today’s ADP figure foreshadows a positive level for Friday’s nonfarm payrolls, which is currently expected to display a 175,000 monthly increase. Crude Continues to Balance OPEC Production Cuts vs. US Expansion The price of oil fluctuated within a tight range today as bearish US supply data offset optimism gained from Russia’s compliance with pledged output reductions. US crude stockpiles for the week ended January 27 reported a 6.5-million-barrel increase, more than doubling expectations of +2.8 million barrels and up 5% YoY. Helping to balance investor sentiment, Russia reported a 100,000 bpd supply cut during January, representing one-third of the total reduction promised. Cuts by OPEC members have similarly been implemented as scheduled, with more than 80% of the promised 1.2 million bpd decrease in January being accomplished. WTI crude is trading up 1.6% for the day to $53.65/barrel while Brent crude has added 0.85% to $55.70/barrel. All three major US stock indices fluctuated throughout the day before finishing higher, with the DJIA (+0.1%), Nasdaq (+0.5%), and S&P 500 (+0.05%) all posting gains. Treasurys sold off to begin the session, with yields/swaps climbing 4-6 bps across the curve before pulling back to its current levels of a more modest 1-3 bps rise. The yield on the 10-year note is up 2 bps on the day to 2.47%.