Stocks jumped to new record highs and the Dow shot past 20,600 on Wednesday after more reports showed the U.S. economy continues to strengthen.
The Dow Jones industrial average climbed 107 points, up 0.5% to a new closing high of 20,611.86.
Also building upon their record highs set in the previous session were the S&P 500 and Nasdaq composite, up 0.5% to 2349.25 and 0.6% to 5819.44, respectively.
The encouraging data could push the Federal Reserve to raise interest rates more aggressively from the record lows marked during the Great Recession.
Wednesday’s economic reports give the Federal Reserve more encouragement to raise interest rates, and economists said the possibility is increasing that it may happen at the central bank’s next meeting in March. Retailers had stronger sales in January than economists expected, and inflation at the consumer level was the highest in years. Consumer prices rose 2.5% in January from a year earlier, the highest rate since March 2012.
Fed Chair Janet Yellen said in testimony before a Congressional committee that the strengthening job market and a modest move higher in inflation should warrant continued, gradual increases in interest rates, echoing her comments from a day earlier. The central bank raised rates in December for just the second time in a decade, after keeping rates at nearly zero to help lift the economy out of the Great Recession.
With President Donald Trump’s litany of executive orders grabbing the limelight, investors turn their attention back to central banks and economic data next week.
Here’s what to watch in the coming days.
The minutes of the Federal Reserve’s December monetary policy meeting showed that the central bank could be forced to lift rates higher than expected if Congress passes Donald Trump’s economy-boosting tax cuts. So, when the Fed meets next week investors will be watching the Federal Open Market Committee’s statement for the Fed’s view on the US economy and inflation.
Economists widely expect the central bank will leave interest rates unchanged, noting that the absence of a press conference with Fed chair Janet Yellen leaves little room for major shifts in policy. “The February FOMC meeting should come and go with little market implications,” Tom Porcelli, economist at RBC Capital Markets, said. “The Fed is likely to continue to strike a positive tone on the economy and they may upgrade their inflation characterization toward a slightly more hawkish slant in the wake of headline CPI now breaching 2%.”
Meanwhile, the Bank of Japan’s meeting next week marks the one-year anniversary of its adoption of negative interest rate policy. The central bank is not expected to change its policy but it will provide updates on economic growth and inflation.
“Next week’s BoJ meeting should reveal a resolute central bank in its yield curve control framework,” Mazen Issa at TD Securities, said. “We expect the BoJ to be side-lined on all fronts. Speculative ‘taper talk’ is premature though we think this dynamic will need to be reassessed in the coming months.”
Elsewhere, the Bank of England is also expected to leave policy unchanged and update its forecasts as it unveils the inflation report. Economists expect the BoE to maintain a neutral stance on policy.
Did you ever notice that when you look at all the failed predictions in any given December, what ended up happening was the opposite of what everyone predicted?
Contrarian Economic Predictions
Given that most predictions end up being wrong, why not just take a look at what passes for conventional wisdom and do the opposite?
Warning: many of these involve Trump.
1. Trump is going to nuke somebody in 2017
It is true that Trump wants to increase, rather than decrease, our nuclear capabilities, which runs pretty much counter to anybody’s idea of what constitutes peaceful behavior in 2017.
The interesting thing about the nuclear threat is that as the popular perception of it has waned since the Cold War, the actual nuclear threat has increased as the number of nuclear weapons has declined.
What if the opposite happens—what if peace breaks out all over in 2017? And what if it is because of Trump?
The FOMC Minutes are due today at 2 pm ET (1900 GMT)
The economic calendar is light today so it’s all about flows to start the year and the FOMC Minutes later in the day.
In general, the Minutes are a release that always gets more attention than deserved. It’s rare the report moves the market and the initial move is often reversed.
But that might not be the case this time because the FOMC hiked rates at the December meeting and left the timing on subsequent rate moves ambiguous. The big market driver was the change in the dot plot.
Here is September compared to December:
Meanwhile, in the press conference Yellen emphasized that the thinking at the Fed hadn’t changed much.
“The shifts that you see here are really very tiny,” she said about the dot plot.
The sell-off in government bonds continues, with US Treasuries leading Asian counterparts lower on Monday and ahead of the Federal Reserve’s decision on interest rates later this week.
The yield (which moves inversely to price) on the benchmark 10-year US Treasury rose as much as 2.74 basis points in morning trade today to 2.4949 per cent.
That level is not quite enough to surpass the intraday high of 2.4985 per cent hit on June 11, 2015, but it puts it on track to be the highest closing level since September 2014, which also happens to be the most recent month when yields closed above 2.5 per cent.
There’s a similar pattern playing out with Japanese and Australian government bonds today. The 10-year JGB yield is up 0.2 basis points at 0.063 per cent, the highest level since February this year. The yield on the 10-year George Lazenby*, up 4.3 basis points at 2.858 per cent, is at its highest level since December 2, which in turn is the highest level of 2016.
Yields on government bonds have galloped higher since Donald Trump won the US election, with markets taking the view his economic policies would spur inflation. That has blunted demand for haven investments, such as Treasuries, the Japanese yen and gold.
More broadly, the inflation outlook in the US has been picking up this year such that markets think the Federal Reserve will be comfortable with lifting interest rates by 25 basis points at their policy meeting on Wednesday, the first increase in a year.
Not even the threat of an interest rate hike next week from the Federal Reserve could derail the U.S. stock market’s record-setting run as Wall Street posted its best five days since the presidential election and doubled down on its bet of better times ahead under new political leadership at the White House.
The bullish vibe on Wall Street is best illustrated by the blue chip Dow Jones industrial average, which surged nearly 600 points, or 3.1%, on its way to posting a fresh all-time high on each trading day of the just-ended week.
The Dow, which is up 13.4% this year, is now within 243 points of Dow 20,000, a milestone few imagined was possible at the bottom of the bear market back on March 9, 2009, when the Dow fell to 6,547.05.
The Standard & Poor’s 500 index, Nasdaq composite and small-stock Russell 2000 also finished the week at record levels.
The big gains came even though Wall Street is pricing in a nearly 100% chance of an interest rate hike from the Federal Reserve Wednesday, its final meeting of the year. Wall Street is expecting a quarter of a percentage point rise by the Fed, which would mark the U.S. central bank’s first rate hike of 2016, despite forecasts at the start of the year for three or four hikes.
Following the Fed’s meeting Wednesday, Wall Street’s attention will turn to its policy statement, its updated projections for the economy, inflation and future rate hikes, as well as Fed chair Janet Yellen’s comments during a press conference with reporters.
The big run-up in stock prices, up to this point, has been based mainly on hopes that Trump’s policies will boost economic growth as well as corporate sales and profits
Stocks rose Thursday as Federal Reserve Chair Janet Yellen emphasized that the Fed is likely to raise interest rates ‘relatively soon’, which sent bond yields higher and gave banks a boost.
The Standard & Poor’s 500 index gained 10.18 points, or 0.4%, to close at 2187.12, just 3 points short of its record closing high of 2190.15 set August 15. The Nasdaq composite index jumped 39.39, or 0.7%, to 5333.97, slightly short of its all-time closing high of 5339.52 set September. 22. The Dow Jones industrial average, which hit record highs last week, gained 35.68 points, or 0.2%, to close at 18,903.82. .
Federal Reserve Chair Janet Yellen said again that the Fed is more likely to raise interest rates soon. She testified before Congress, and in prepared remarks, Yellen sketched a picture of an improving U.S. economy. The Fed is widely expected to raise rates when it meets in mid-December. She added that if the Fed keeps waiting now and later raises rates too quickly, that increases the risk of a recession.
Bond prices slipped. The yield on the 10-year U.S. Treasury note jumped to 2.28% from 2.22%. Bond yields rise when investors expect higher interest rates.
Though the election of Donald Trump as the next U.S. president has complicated the U.S. economic outlook, financial markets still think that a Fed rate hike next month is far more likely than not. What’s more interesting to markets is when the ensuing rate hike will be and it’s here that Trump’s victory could impact. Trump has promised to cut taxes and raise infrastructure spending, measures that could boost economic growth and potentially spur inflation. That’s seen a rally in stocks, a sell-off of U.S. bond yields and a concurrent rise in the dollar.
The Federal Reserve could raise U.S. interest rates “relatively soon” if economic data keeps pointing to an improving labor market and rising inflation, Fed Chair Janet Yellen said on Thursday in a clear hint the U.S. central bank could hike next month.
Yellen said Fed policymakers at their meeting earlier in November judged that the case for a rate hike had strengthened.
“Such an increase could well become appropriate relatively soon,” Yellen said in prepared remarks that were her first public comments since the United States elected Republican Donald Trump to be the country’s next president.
Yellen, who was to deliver the remarks to lawmakers at 10 a.m. (1500 GMT) on Thursday, said the economy appeared on track to grow moderately, which would help bring about full employment and push inflation up and toward the Fed’s 2 percent target.
Is it Donald Trump or the line-up of Federal Reserve speakers or both?
Federal fund futures — or the contracts that investors use to bet on interest rate movements — imply a 92 per cent chance of a rate rise next month, compared with 84 per cent on Friday.
The move comes as investors expect president elect Donald Trump to unleash stimulus that will drive economic growth and push inflation higher. Fed policymakers have previously stated that they were watching for “some further evidence of continued progress toward its objectives” — with one of those objectives being 2 per cent inflation.
The move also comes as more than a dozen Fed policymakers deliver remarks this week. The list includes Fed chair Janet Yellen’s testimony to the Joint Economic Committee. It also includes remarks from New York Fed president Bill Dudley, Boston Fed president Eric Rosengren, vice chairman Stanley Fischer, Kansas City Fed president Esther George — all members of the monetary policy setting Federal Open Market Committee.
The Fed last raised interest rates in December 2015 and is scheduled to begin its next two-day meeting on December 13.