U.S. Economy: So far, so good

U.S. Economy: So far, so good

Consumer prices, wage growth and retail sales came in solid; the U.S. bond market was shaken but not stirred; why the euro had a good week; Russia’s brush with recession could be temporary.

“We have felt since the elections that the world will not wait for us”
– German Chancellor Angela Merkel, on negotiations to form a ruling coalition.

U.S. in December: So far, so good Data released Friday showed core consumer prices up 0.3% for December, bringing the full year figure for 2017 up to 1.8% -- still stubbornly below the Federal Reserve (Fed)’s target of 2%. Average weekly earnings for the year grew faster than consumer inflation for the month, by a small but measurable 0.7%; average hourly earnings were ahead by 0.4% for the year. A first estimate of December’s retail sales confirmed the consensus belief that the holiday shopping season was a success; ex autos and gasoline, sales rose a seasonally-adjusted 0.4% above November’s figure, which itself came in at an upwardly-revised 0.8%. U.S. 10-year Treasury yields briefly spiked to 2.59% on this mix of data before settling back to a 2.56% - 2.57% range,1 suggesting that at least in the short term, the news was viewed positively, if not enthusiastically.

Bonds: Shaken not stirred For all the talk last week about an end of the 30-year bull market in bonds and the incipient inversion of the U.S. Treasury yield curve, the curve itself didn’t move much week-over-week – and what did change was relatively small. It was only at the longer-end of the curve, in the 10y-30y spread, that any inversion was visible, at a negative -2.66 basis points (bps). Spreads involving the shorter end of the curve, however, moved upward; the 2- to 10-year spread by about 3.8 bps, and the 2- to 30-year spread by 1.4 bps. For the full week, yields were up only slightly: by 5,0, 8.9 and 6.4 bps for the 2-, 10- and 30-year Treasuries respectively. No doubt that Wednesday’s sudden jump in yields caught the attention of market participants and observers, as has the steady rise of 2-year Treasury yields past 2.0%; only time will tell whether this is a blip or a turning point.

Euro: A good week The euro rose solidly against the U.S. dollar, moving up through $1.21, a level not seen for over 3 years. Two key reasons:  first, signs of success in the long negotiations for a coalition government in Germany, suggesting a second potentially divisive election may not occur. The second reason was less positive – a pick-up in yields in Europe’s bond markets, due to skepticism about the European Central Bank’s stated plan to continue buying up a substantial portion of Europe’s bond issuance as the economies move forward. Rising yields could reflect the expectation of a major buyer stepping away from the market sooner rather than later.

Russia: Technically speaking… The widely-accepted definition of a recession is two sequential quarters of annualized negative economic growth. Russia appears to have qualified for this dubious distinction for the second time since the end of Q2 2016. But with energy prices on the upswing for both crude oil and natural gas, this state of affairs could end relatively rapidly.

1 Source: Bloomberg, Jan 12, 2018, 9:35 AM ET


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