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.
The 200-day correlation between US stocks and the MSCI World Index is currently 45%. This is the second lowest level since 2008. The only time the 200-day correlation was lower was in July 2014.
The recent backup in yields is happening at an unfortunate time. In nominal terms, debt held by the public is at an an all-time high (approximately $14.3 trillion).