At least since 2003 (which is when our data on TIPS begins), the dollar and breakeven inflation expectations have had a negative relationship. Said differently, when the dollar strengthens (as it has done recently) inflation expectations tend to fall and vice versa.
The December Conference Board Consumer Confidence survey had some interesting results. One of the more noteworthy changes were in regards to equity price expectations.
Most of the time not a whole lot actually changes in the markets over the course of a month. For example, small cap stocks tend to outperform large cap stocks by a rather mundane 31 bps over the course of a month on average going back to 1996.
The Fed has communicated that the plan for 2017 includes three rate hikes. The market isn’t quite buying into that plan yet.
According to the Fed’s dot plot, the fed funds rate will be 2.125% be December 2018. This is about 40 bps higher than what the current Dec 18 fed funds futures contract is pricing in.
The US has outperformed the MSCI World Index by over 26% since the 3/9/2009 low while the rest of the developed world has dramatically underperformed.
The recent increase in interest rates have already hit the mortgage refi market and higher rates look like it may be a headwind to the overall housing market in the first half of next year.
Recent inflation fears have helped lead to a sell off in bonds. From a total return perspective, the 30-year US treasury has declined by 13% and the 10-year US treasury has declined by 6% over the past 100-days.
The high yield spread over the 10-year treasury has synced up to changes in breakeven inflation.
Emerging-market stocks have suffered from a Trump-induced hangover after surging through the first 10 months of 2016. We think investors should put the new risks into perspective.