As we enter the last throws of Q1 2016 focus this week will once again turn to the Fed. Over the last week or so Fed speakers have been quite upbeat on the outlook for the US economy, warning that a further rate hike is certainly in play for their April and June meetings. Today Janet Yellen speaks in New York and will be eagerly listened to for further clues as to the Fed Chair’s own read on the economic environment ahead of Non-Farm payrolls on Friday.
From a Fed member’s point of view it is easy to see the concerns some members have with the current rate posture, when we look at the key fundamental indicators the Fed have maintained are key to setting the policy rate. GDP growth has averaged 2.1% over the last five years, Non-Farm payrolls have run at a rate of 210k to 225k per month over the same period, core CPI is above the Fed's 2% target and PCE growth is up at 1.7% year on year, above the Fed's own 1.6% expected year end level.
This afternoon we have the S&P Case Shiller home prices release for January which is expected to rise again by around ¾ of a percent, pushing prices ever closer to their pre-crisis levels. West coast prices which fell the most are bouncing back by around 1% per month and should hit their pre-2001 levels around midyear with national prices forecast to get back to flat later in the fourth quarter. This would put housing up around 4% per annum since 2001, about 1% per year more than the stock market (S&P) and an out pacing of inflation by about 2x.
So is this wave of optimism negative for bonds? We would argue NO as a Fed ahead of the curve is a positive factor for our positioning, for future inflation rates and for the outlook for better rated credits which will find little difficulty with a tightening in funding conditions; unlike lesser credits rolling short dated debt which could find the lending environment anything but friendly.