January 31, 2018

Trump gave the state of the Union speech last night, where he tried to focus the night on job growth, economic growth, tax reform, immigration, and health care.  News outlets reported that the speech took an overall unifying tone, and that the majority of watchers approved of the speech.

In the last week, treasuries rates have drifted higher and finally broken through key resistance levels.  As an example, the 5-year treasury broke above 2.50% and traded as high as 2.55% briefly earlier today.  The 10-year treasury broke through its key level of 2.63% and also reached as high as 2.75% this morning.

Lastly, the Fed concluded their January meeting, and subsequently released their statement. It was Yellen’s last meeting today, and the FOMC decided to leave rates unchanged.  The Fed continues to believe, perhaps with even more confidence than in the past, that inflation will rise to their 2% target.  With Powell now taking over for Yellen on February 3, he has been in favor of Yellen’s gradual approach thus far and is likely to continue the trend once in place.  We also expect to get our first rate hike of the year in March.  The decision to keep rates the same today was unanimous and fully expected by the markets.  However, we did see a slight adjustment in the yield curve, now implying a 65% chance that the Fed achieves the 3 rate increases that it wants to this year.  More importantly, the probability of a rate increase again in January of 2019 is now up to 30%.  This means that while the market is starting to really believe that the Fed can actually raise rates 3 times this year, it is also wondering if they can pull off a full 100 basis point increase over the next 12 months.

Eric C. J. Swanson, CFA