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March 6, 2017 - Is a Rate Hike Coming?

| March 06, 2017
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On Wednesday, March 1, the three major domestic indexes all had their best performance in 2017 and reached record highs yet again.[1] In fact, the S&P 500 hit 2,400 for the first time ever on the same day the Dow went above 21,000 for the first time.[2] While the markets cooled slightly on Thursday and Friday, all three indexes were up for the week. The S&P 500 added 0.67%, the Dow increased by 0.88%, and the NASDAQ was up 0.44%.[3] International equities in the MSCI EAFE also grew, adding 0.39% for the week.[4]

In the midst of more record performance, we received a number of data updates that help improve our understanding of the true economic environment and potential for the Fed to increase interest rates next week.

What We Learned Last Week

Fourth Quarter 2016 GDP Readings Stayed the Same

On February 28, we received the second reading of Gross Domestic Product (GDP) for the fourth quarter of 2016. The consensus expectation was for the reading to increase to 2.1% from the 1.9% growth in January's Advance report.[5] However, the newest data did not show any change in Q4 GDP.[6]

Manufacturing Activity Increased

The ISM manufacturing survey beat expectations to come in at 57.7 for February - the highest reading in 2.5 years and the best yearly start since 2011.[7] Levels over 50 indicate expansion, so this data provides a positive signal for our manufacturing sector.[8]

Service Sector Activity Increased

In February, the service sector grew for the 86th straight month, with the ISM non-manufacturing survey coming in at 57.6.[9] Both new orders and business activity had faster expansion, and the employment index also increased.[10]

Consumer Confidence Hit a More Than 15-Year High

The latest consumer confidence numbers from the Conference Board have not been this high since July 2001.[11] Fewer people think that jobs are "hard to get," and many "consumers expect the economy to continue expanding in the months ahead."[12] Of course, consumer confidence is no guarantee for future circumstances; instead, it measures sentiment and currently indicates that many people feel more positively about the economy.

Personal Income Went Up

The latest personal income data indicated a 0.4% increase in January - for a 4.0% yearly increase.[13] In addition, the Personal Consumption Indicator (PCE) deflator, which measures consumer inflation, grew by 0.4% in January, the largest monthly increase since 2011.[14] The Federal Reserve follows the PCE deflator very closely, so this recent jump could be another sign that a March interest-rate increase could be more likely to occur.[15]

These data updates are only a few of the economic details we learned last week, but together, they may help explain why the Fed could increase rates in the March 14 - 15 meeting. As recently as Tuesday morning, the odds of a rate hike were only 35%.[16] By Friday, they had increased to 81%, due to strong economic data and remarks from Fed representatives.[17] On Friday, Fed Chairwoman Janet Yellen said that if employment and inflation continue to change as they expect, then a change to the "federal funds rate would likely be appropriate."[18]

Combined with the recent PCE deflator increases, this Friday's employment data should help provide more context for the Fed's decision. However, as we have seen before, no one truly knows what the Fed will decide until they make their announcement after the meeting. For now, we will monitor the data and wait to hear the Fed's announcement on March 15.

ECONOMIC CALENDAR:

Monday: Factory Orders
Tuesday: International Trade
Wednesday: Productivity and Costs
Thursday: Import and Export Prices
Friday: Employment Situation

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.


These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia and Southeast Asia.

The S&P U.S. Investment Grade Corporate Bond Index contains U.S.- and foreign-issued investment-grade corporate bonds denominated in U.S. dollars.

The SPUSCIG launched on April 09, 2013. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

You cannot invest directly in an index.

Consult your financial professional before making any investment decision.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

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  1. http://www.cnbc.com
  2. http://www.marketwatch.com
  3. http://finance.yahoo.com
    http://finance.yahoo.com
    http://finance.yahoo.com
  4. https://www.msci.com/
  5. http://wsj-us.econoday.com/
  6. https://www.bea.gov
  7. http://www.ftportfolios.com
  8. http://www.ftportfolios.com
  9. http://www.ftportfolios.com
  10. http://www.ftportfolios.com
  11. http://www.marketwatch.com
  12. http://www.marketwatch.com
  13. http://www.ftportfolios.com/
  14. http://www.ftportfolios.com
  15. http://www.ftportfolios.com
  16. http://money.cnn.com
  17. http://www.cnbc.com
  18. http://www.cnbc.com/
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