The stock market took in stride comments from Federal Reserve Chair Janet Yellen on Friday that an interest rate increase “would likely be appropriate” at the Fed’s next monetary policy meeting in mid-March.
The markets had largely discounted that news before Yellen made those comments in a speech in Chicago, as they had been foreshadowed by several other Fed officials throughout the week, basically preparing investors for that likelihood. Stocks finished slightly higher on Friday and up again for the week. The Dow led the pack with a 0.9% gain, its fourth straight weekly advance. The S&P 500 rose 0.7% while NASDAQ added 0.5%, both indexes rising for the seventh consecutive week. “At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Yellen said, adding that “the economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2% objective.”
Not surprisingly, bond prices were sharply lower and yields higher on the expectations of higher interest rates. The bond market was largely skeptical of a March rate increase the prior week, when yields fell, but got the message last week following the rate-hike comments from a parade of Fed officials, culminating with Yellen’s speech. The yield on both the two-year and 10-year Treasury notes jumped by 17 basis points last week, closing at 1.31% and 2.48%, respectively. In the short-term market, the yield on the 30-day T-bill shot up 20 bps to 0.70%, its highest rate since the global financial crisis in 2008.
It was a very busy week for reports about the U.S. economy, which generally justified the Fed’s outlook. Revised fourth quarter 2016 GDP growth was unchanged at 1.9%, which was somewhat disappointing as Street estimates were calling for an increase to 2.1%. But the Fed’s Beige Book covering early January through mid-February said the economy expanded “at a modest to moderate pace” while “labor markets remained tight in early 2017, with some districts noting widening labor shortages.” Indeed, initial jobless claims for the last full week of February dropped by 19,000 to 223,000, well below expectations and the lowest level since 1973. The Institute for Supply Management’s manufacturing index rose to 57.7 in February from 56 a month earlier, hitting its highest level since August 2014, while its non-manufacturing index, which covers most of the economy, rose more than a full point to 57.6 from 56.5. Durable goods orders for January rose 1.8% but the increase was skewed upward by military and civilian aircraft orders; excluding transportation, orders were down 0.6% and core capital goods off 0.4% after rising 1.1% the prior month.
In the consumer sector, personal incomes rose 0.4% in January while spending rose 0.2%. The Conference Board’s consumer confidence index continued to rise, climbing more than three points last month to 114.8, well above expectations. In housing, the National Association of Realtors’ pending home sales index for January dropped unexpectedly by 2.8% after rising the prior month, which the group blamed on a shortage of homes for sale as well as higher prices and mortgage rates. Indeed, the S&P CoreLogic Case-Shiller 20-city home price index rose nearly a full percentage point in December, the steepest rate in 2 ½ years, and up 5.6% compared to the year earlier. Construction spending dropped 1% in January, but residential building remained strong, with spending on single-family homes up 1.1% and multi-family higher by 2.2%.
Reports/dates/facts/links worth paying attention to over the next week:
1. March 6: Factory orders for January.
2. March 7: Consumer credit for January.
3. March 8: ADP national employment report for February.
4. March 9: Weekly unemployment claims.
5. March 10: Employment situation for February.