Inflation Expectations and Interest Rates
As expected last week, the Federal Reserve held interest rates unchanged, but did revise its post-meeting statement to reinforce that inflation has moved closer to its 2% target. This change in language is most likely a precursor to a June interest rate increase, which I expect will be the second of three rate hikes in 2018.
This week’s consumer and producer inflation data will be closely scrutinized with the expectation that prices will continue to have upside pressure. The expectation is for the CPI to be up 0.3% for the month and 2.5% year over year. The stakes for the bond market are very high, as last month’s unemployment rate fell to a new low of 3.9% and oil is currently trading around $70 per barrel.
I will also be watching the Treasury bond auctions this week to see how the larger auctions are received by the market. $73 billion in Treasury securities will be auctioned off this week, a roughly 10% increase over the prior quarter’s auction.
I remain defensive on fixed income assets as rising yields over the next few months could lead to negative returns. My expectation is for the 10-year Treasury to reach 3.25% by June 30. During the same time period, I anticipate equities will remain range-bound between 2550 and 2750 on the S&P 500 Index.
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