Economic expansion may be reaching its end

Every week brings new developments that grab the attention of investors. Political and economic developments dominated headlines last week, and, in general, most investors focused on the positives. President Trump announced our withdrawal from the Iranian nuclear accord and renewed sanctions on that country’s oil exports, sending oil prices to their highest levels in 3 years. Crude has remained in a solid uptrend, supported by rising global demand, adherence by OPEC countries to production cuts, and trouble with Venezuelan exports.  It is plausible that we have returned to the risk-on trade and volatility has retreated, for now. The S&P 500 Index jumped 2.5% for the week with energy, financials, technology and industrials all climbing more than 3%.

Interest rates are also making headlines as the 10-year Treasury yield ended Friday at 2.97% and climbed above 3.00% on Monday.  Rising interest rates suggest inflation but Thursday’s consumer price index came in below-consensus for April and likely alleviated fears of inflation concerns.  This was one more catalyst for the recent stock rally.  Markets have been sensitive to inflation readings while looking for direction on whether the Fed is likely to raise interest rates two or three more times in 2018.  In spite of a slower than expected first quarter, we are anticipating a total of three interest rate increases during the current year.  Supporting our thesis, the Atlanta Fed sees real GDP rising to 4% over the next few months.   Inflation moved higher in the first quarter, but remains at a level that should not impede growth.  Finally, Fed balance-sheet tightening is expected to accelerate later this year; unwinding the Fed’s bond supply began at just $10 billion per month in (2017) with plans to reach $50 billion per month by late 2018.

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