What’s Behind the Renewed Focus on Inflation?


While most eyes were focused on equity earnings last week, the more interesting movements were taking place in the bond market. In what was an abbreviated trading week due to the Columbus Day holiday, Treasury yields continued to churn higher in an ascent that traces back to early July. The ten-year note yield ended the week at 1.79 percent, up seven basis points from the prior week. In just the first two weeks of October alone the yield has jumped 20 basis points. The yield is now back to where it was in early June, just prior to the disappointing May jobs report and before the surprising Brexit vote. But after a soft patch in August, more recently the economic data has firmed, inflation readings have turned higher and the Fed seems to be on a path to raise rates in December.

Have the Fed’s Attempts at Transparency Become Counterproductive?

The big news last week was, of course,  the September labor market report, which showed the economy having created 156,000 new non-farm jobs, slightly fewer than expected, while the unemployment rate edged higher to 5.0 percent as more people looked for work. The question on everyone’s mind was what impact the report would have on expectations for the next Fed rate hike. As it turns out, those expectations rose fractionally for an expected rate hike at the Fed’s December meeting, to 64.3 percent after the report, up from 63.6 percent the day prior. There was a similar move higher regarding the February, 2017 meeting from 65.9 to 67.2 percent. In other words, the report was just good enough to keep expectations on track for a year-end rate hike.

What Can We Expect in Q4?

The S&P 500 ended the third quarter with a gain of 3.3 percent. It was the best quarter of the year, and leaves the index higher by 6.1 percent. Far and away the best performing sector was technology, with a gain in excess of 10 percent. Industrials and financial stocks had gains of 4.0 percent. At the opposite end telecom, utilities and consumer staples stocks suffered losses. It’s worth noting that all of the third quarter’s gains for the broader index came in July. Stocks were fractionally lower in both August and September. Even technology, the only sector to post a positive return in each of the quarter’s three months, enjoyed 70 percent of its gains in July.

Politics and Policy Take Hold of Markets


Last week the focus was on central bank policy. This week that focus will shift back toward economic fundamentals and politics, and investors may not be entirely comfortable with what they see.