market views

Look at the Nitty Gritty to See the Bigger Picture

Frank Trotter | March 1, 2017 3 MIN READ

Here in mid-February, it’s been almost one month since Inauguration Day. As happens every four years, albeit with some additional spice around the debate this time, campaign promises are running headlong into a combination of Washington, D.C. politics and mathematical reality. So, what will be accomplished and what will end up on the cutting room floor? To provide some food for thought, here are a few notes on what we’re seeing today.

The Fed

For most of pre-election 2016, and a good bit of 2015, the markets appeared to focus on statements by the U.S. Federal Reserve, parsing their sentences and speculating about what it all meant. In 2017, there’s been a lot of activity emanating out of our national capital so far and that’s been added into the mix. But now and again, we return to our old friends.

Today’s news for example is dominated by the elimination of one word in Chairman Yellen’s statement to Congress. In January, she used the term “modestly accommodative” in her speech to the Stanford Institute for Economic Policy Research. Yet, in the Fed's February press release, she just used “accommodative” when discussing their stance on monetary policy. A variety of commentators feel this means there’s a higher probability that the Fed Funds Target Rate will rise in March (still way under 50%), and a higher chance in May.

In the markets, the 10-year US Treasury Note is yielding about 2.50% (as of 2/15/2017). That’s quite a bit higher than the 1.80% level from this time last year, back on par with rates from 18-months ago, and around 0.20% less than what we saw in February 2015. So is the market less optimistic than two-years ago?

Back then, I thought the yields suggested there would be nominal growth over the next 10 years, with very little inflation. I would continue to suggest the same conclusion as indicated by the invisible hand.

Doctor Copper—Predicting Our Economic Health

Doctor Copper, on the other hand, may be showing some optimistic tendencies. While certainly not infallible, copper prices are thought to be one of the best indicators of upcoming economic activity—at least in the mythology of the marketplace.

View a larger image here

Data Source: Bloomberg
Graphics: EverBank

As you can see from the chart, given copper's current prices, the essential industrial metal has risen in the neighborhood of 35% in a little over a year. Not a bad run in a hard-to-interpret world. It’s another 35% or so away from the levels seen in the past five years, but it is a good start and I choose to think this is a positive outlook for activity.


Way back in time, last April to be exact, I discussed how different measures of inflation may lead us to draw significantly different conclusions about the economy.

Today it appears that all major measures are headed up. The Consumer Price Index, on an unadjusted basis, is up 2.5% at last measure. The American Institute for Economic Research’s Everyday Price Index, in a very rare occurrence indeed, also shows a 2.5% increase over a year.1 And Chairman Yellen seems to indicate that inflation is approaching her target rates.

This happens to be one of those things we should all love to hate. Blooming inflation often indicates that an economy is becoming stronger, placing pressure on prices and wages. On the other hand, our money is then worth, on average, 2.5% less than it was this time last year.

Borrowers, like the U.S. Government however, are happiest in an inflationary period. This allows the entity borrowing money to do things today and pay it all back later with currency that is worth less (not worthless). Sounds like a politician’s dream!

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

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