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Market Commentary 4/28/17

Interest rates remained basically unchanged from last week. It is unclear where the economy is headed from here, with various indicators conflicting. On one hand, strong corporate earnings and consumer sentiment reports suggest a surging economy. On the other hand, published soft economic data suggest things are anemic at best.

Domestically, the big news this week was the first reading on Q1 2017 Gross Domestic Product (GDP). GDP fell to 0.7% in the first quarter, below the 1.1% expected and below the 2.1% recorded in Q4 2016. In addition, consumer spending plunged to 0.3% from 3.5% last quarter, the weakest showing since Q4 2009. The weak consumer spending was blamed partly on the mild winter, which translates to less spending on utility bills. However, there were some inflationary readings that were bad for bond yields. Personal consumption rose 2.4%, the highest since Q2 2011. The inflation reading for the Employment Cost Index, which measures wages and benefits paid to workers, rose 0.8% in Q1 2017, the fastest pace in seven years. All in all, this mixed bag of GDP data did little to move bond yields off of current levels.

Overseas, Japan and Europe remain committed to keeping interest rates low as each country tries to stimulate economic growth. This has benefited U.S. bonds by providing a ceiling on spreads between foreign and U.S. government interest rates, and between mortgage and corporate yields, especially if one believes the economy is improving.

With the 10-year note yield once again hovering at 2.30%, we continue to remain biased toward locking in interest rates at what we know to be still near historically low interest rates.

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