Author: David I. Templeton, CFA, Principal and Portfolio Manager
This week investor attention will likely have a heightened focus on statements from the Federal Reserve following its two day meeting on Tuesday and Wednesday. Recent equity market weakness may be partially associated with Fed statements late last year indicating a tighter monetary policy stance, i.e., higher rates, beginning in March. Since mid December, the 10-Year U.S. Treasury yield has jump from around 1.33% to a recent 1.78%. The most recent 10-Year rate is down from last week's high of 1.90%. During this move higher in longer term rates, the yield curve has actually flatten, short rates rising more than long rates. The spread between short and long rates now equals .75% or 75 basis points. I touched on this in an article last week, Yield Curve In Focus And Sentiment. The sentiment discussion centered on investor sentiment and not broader consumer sentiment.
Consumer sentiment is a variable the Fed likely places weight on as the consumer accounts for 70% of economic activity. Historically, the Fed has not raised the Fed Funds target rate when consumer sentiment was this low. As the maroon line in the below chart shows, the January reading for the University of Michigan Consumer Sentiment was at 68.8. This is down from 88.3 in April of last year. Clearly, the UofM reading has been mostly near the 80 level at the start of prior tightening cycles.
With last week's report on both jobless claims and continuing claims coming in higher than expectations, possibly the heated pace of economic growth is slowing. Certainly the Fed needs to get interest rates off the zero bound, but four rate hikes this year might be more than the economy can digest.
HORAN Capital Advisors, LLC is an SEC registered investment advisor. The information herein has been obtained from sources believed to be reliable but we cannot assure its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HCA and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.