Inflation in the United States seems to be rebounding. Moreover, U.S. equities have been rallying on strong economic fundamentals, leading to an increase in investors’ risk appetite and reallocation of funds from bonds to equities. Bond prices move inverse to bond yields.
What’s Moving Yields?
Consumer prices increased at the strongest pace in 11 months. The core CPI, which excludes prices of volatile items such as food and energy prices, increased 0.3% in December compared with 0.1% in the last month. On a year-over-year basis, it expanded 1.8% in December compared with 1.7% in the prior month.
United States GDP grew 3.2% in the third quarter compared with 3.1% in the previous quarter. However, it came in below expectations of 3.3%. Moreover, President Donald Trump’s tax reform was recently signed into law, increasing investor optimism regarding other pro-business policies of the U.S. president.
Coming to consumer sentiment, U.S. retail sales grew 4.2% in 2017 compared with 3.2% in 2016, showing signs of a strengthening economy. This has increased market’s beliefs in a rate hike in the March FOMC meeting. Per the CME Fed Watch tool, markets believe there is a 72.6% chance of a 25 basis point rate hike and a 1.1% chance of a 50 basis point rate hike on the Mar 21, 2018, FOMC meeting.
From a demand perspective, China is the biggest buyer of U.S. sovereign bonds. Per a Bloomberg news report, Chinese officials had recommended slowing or potentially halting its purchase of U.S. bonds. However, China’s foreign exchange regulator later dismissed those reports, saying that they were based on incorrect information.
Coming to events at the White House, the Congress will need to pass an extension in order to avoid a potential government shutdown after Jan 19, 2018. If there’s no budget deal by the end of this week, Congress will have to pass its third short-term extension since December to avoid a federal government shutdown.
