Market Review

During the month, Fed Chair Yellen provided the semiannual testimony to Congress, which appeared to align with recent meeting minutes. The takeaways indicated an inclination to begin allowing the Fed’s balance sheet to decline in a gradual manner starting in late September or October. As a result, no change in interest rates is expected in September, with December being data and market dependent. 

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The Federal Reserve has reemerged front and center in the debate over interest rates. While the Fed never takes a backseat in the minds of bond investors, the preeminence of Fed activity had been overshadowed by the fiscal policy implications of the new Administration’s tax cutting and infrastructure spending plans. Fed policy makers moved forward with another rate increase, the second this year and the fourth in the current tightening cycle, along with an outline for the potential tapering of bond purchases.

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Treasury yields declined modestly during the month and the yield curve flattened, a continuation of trends seen for most of 2017. Ten-year yields initially rose to 2.41% early in the month, before falling to 2.23% at monthend. The 2- to 30- yield curve spread has declined by 30 basis points since the beginning of the year.

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Disappointing economic data and concern over the impact of the French presidential election weighed on the market, leading investors to buy bonds and push rates modestly lower. Treasury yields fell from two years and out, with the 10-year portion being the biggest beneficiary, flattening the yield curve.

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One of the biggest surprises this year may be how staid the markets remained regardless of news, global events, and economic data. In January, we saw the first presidential change in eight years. Many feared that the tweeting and rhetoric common during the campaign may have an impact on financial asset prices. Instead, even with a senior administration official resigning, news of an FBI investigation, and the failure of signature legislation, markets barely moved. 

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Economic statistics continued to provide a mixed message about the strength of the economy, with trade and GDP figures disappointing but payroll and retail sales data showing some improvement. Inflation ticked up and core CPI hit 2.3% year-over-year, high enough to raise red flags for Fed watchers. In fact, the Federal Reserve meeting minutes released mid-month led a number of investors to believe that the Fed was moving toward a more hawkish stance.

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