Expect a Strong Economy and Low Inflation. Rates Move Higher, but Stocks Await Earnings

January 12, 2015

Expect a Strong Economy and Low Inflation. Rates Move Higher, but Stocks Await Earnings Photo

Last week, the markets experienced significant volatility. Friday's solid employment number makes 2014 the best year for employment gains since 1999 and continues to reinforce that the U.S. economy remains robust. The headline number was strong, with 252,000 jobs added in December and the unemployment rate falling to 5.6% from 5.8%. The one disappointing statistic in the monthly release was the -0.2% change month over month in average hourly earnings. Despite job gains, wage pressure remains limited and supports the idea that inflation should remain low for the foreseeable future.

This week will have a significant number of economic releases that we expect to confirm the U.S. economy's strength. The Producer Price Index (PPI) and Consumer Price Index (CPI) will be key for the bond market direction, and anything other than low inflation data will be a disappointment to the bond market as expectations for falling inflation are fully priced into the market.

With that as a backdrop, we expect interest rates to move higher this week as the Treasury market is still overbought and 10-Year Treasuries were not able to break below key technical resistance of 1.86% (the intraday low of October 15, 2014) last week. Despite the expected increase in rates, we still think the amount of sell-off is limited given that the Federal Reserve is still on course to tighten monetary policy around mid-year and inflation overall is low. We expect stocks to trade in a fairly tight range until we start to get earnings reports, with volatility driven by headline risk in oil and geopolitical events.

Tags: Monday Morning O'Malley | Bonds | Stocks | Inflation | Federal Reserve | Interest Rate | 10-Year Treasury | Unemployment report | Monetary policy | CPI | PPI

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