Daily Market Color January 3, 2018FOMC Releases Minutes from December Meeting FOMC Mindful of Yield Curve, Monitoring Inflation In an otherwise uneventful release of the minutes from the December meeting of the FOMC, the comments most focused on by market pundits were those addressing the slope of the yield curve and inflation. As expected, most of the officials backed the continued gradual rate increases. The FOMC was also generally in agreement on the overall economic outlook for the economy. Inflation was a significant point of debate. The dialogue centered around two possible scenarios that the FOMC saw as roughly balanced. The first scenario would require the FOMC to raise rates more aggressively if the inflation pressures grow unchecked as a result of output increases to a level significantly in excess of a maximum sustainable level. In the second scenario, inflation never hits the 2 percent objective that the FOMC has set as its target and thus rates hikes would need to slow or cease. Several members of the FOMC felt the slope of the yield curve warranted continued attention. Some members felt that the possible inversion of the curve could be a leading indicator of a pending economic downturn. This should not come as a complete shock as both Kaplan and Rosenberg were on record voicing their concern about the shape of the curve previously. Some other members of the FOMC believed that the slope of the curve was simply the byproduct of the FOMC’s target range for the fed funds rate ratcheting higher. As such, these members did not believe that the shape of the curve was a cause of or an indication of a pending economic slump. This view was supported by the financial market’s recent performance which did not seem overly concerned about the shape of the curve. Strength in US Manufacturing Today’s release of the Institute for Supply Management’s index of factory activity provided a positive picture of the US manufacturing sector during December. The 59.7 reading, which exceeded expectations of 58.2, displayed robust levels of new orders (14-year high) and production (7-year high). Of the 18 industries captured in the report, 16 reported growth in December, while 2 contracted (wood products and textile mills). The overall ISM manufacturing index has now recorded a reading higher than 55 for seven consecutive months, resolutely holding well above the 50 point threshold associated with expansion. MiFID II Begins The largest financial regulation implementation in the past decade for the European Union market officially came into effect today. The Markets in Financial Instruments Directive II (MiFID II) arrives ten years after its predecessor and focuses on the extension of the original regulation to asset classes outside of stocks. Notably, over-the-counter (OTC) transactions were specifically targeted in the latest rules, requiring a larger number of derivative trades to be executed over an exchange rather than directly between a buyer and seller, in an attempt to increase price transparency and detailed trade reporting in EU financial markets. Major stock and bond markets in Europe finished mostly higher on the day, although trading volumes were relatively thin, as investors remained cautious ahead of the MiFID II enactment. Dollar Ends Slump, Stocks Advance, Bonds Sell Off All three major US stock indices ended the day up once again. Energy and Tech stocks continued to lead the way higher. The Nasdaq closed up 0.86%, the S&P was up 0.64% and the Dow was up a respectable 0.44%. Oil hit a new high ($61.78) up 2.34% on news that US stockpiles had dropped along with the continued political unrest in Iran. The dollar snapped its longest losing streak since September (5 days) up about 0.5% against most major currencies. The 10yr Treasury rallied 2bps down to a yield of 2.45%.