December 8, 2017

Both the House and Senate have both passed their own tax bills. President Trump has made it clear he wants to have a bill on his desk before Christmas, so the process of forming a bill that both sides of congress can agree upon will consume much of congress’ time. The expectation that a new tax deal would be passed has also bolstered advances in stock prices, and a slight increase in interest rates, with the 10-year now trading at 2.38%. We also will be dealing with spending bills and debt ceiling limits in the next could of months as well, if the government wishes to avoid a shutdown.

The unemployment report for November was also released this morning, which is significant because this was the first release that was expected to be absent of any effect from the hurricanes that hit the United States earlier this year. The payroll figure came in at 228,000 jobs, compared with the market’s expectation of only 195,000. This is quite a bit stronger than expected, although wage growth was a bit lower than expected. All in all, there was nothing so noteworthy as to cause us to think that the Fed will not raise rates this month. In fact, the market-implied odds of a rate increase by the Fed next Wednesday (13th) are now up to 98%.

We are starting to hear more widespread acceptance that the yield curve is flattening, and may stay that way. We have been predicting this at BPS for the last two years: that the yield curve could easily flatten out around 2.25%. If we were to experience a fully inverted yield curve, that would normally be a signal of a recession. Only time will tell if the long end of the curve inches higher in the next couple of years as well, or if the curve actually flattens completely.

Eric Swanson, CFA