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A Few Things We’re Watching - Pt 2

May 01, 2018
By Patrick V. Masso, CFA

Follow-Up from August 2017 Issue

During our August 2017 issue, we took a dive into four economic data points we thought warranted close monitoring. Specifically, we focused on:

  • Initial claims for unemployment insurance benefits
  • Inflation as measured by the Consumer Price Index
  • The trade-weighted U.S. dollar
  • High-yield bond spreads

We revisit the first two data points in depth today. The remaining two data points will be covered in the next edition of Investment Insights.

Initial claims for unemployment insurance benefits is one metric we use to monitor the health of the U.S. job market. The report represents the number of individuals who filed to receive jobless benefits. Last August, this metric was running near 240,000. Since then, the labor market has tightened further. The measure ticked down to 222,000 in March. A decline in initial claims correlates to an improving or healthy economy as it indicates higher employment; leading to future economic growth. Other labor market information confirms this improvement.

Conversations about an improving labor market commonly arrive at a discussion about the changes in employee wages and broader inflation measures like the Consumer Price Index. The first two quarters of 2017 saw a significant move lower in inflation from 2.8% in February to 1.65% in June. Since that time, inflation has moved consistently higher. The most recent reading in March puts the statistic at 2.35%.

Higher inflation has allowed the Federal Reserve to continue raising interest rates at a measured pace. Most segments of the bond market struggle when inflation is moving higher. This has been the case in 2018, with the Bloomberg Barclays U.S. Aggregate Bond Index generating a return of -2.47% as of this writing. On the flipside, rising interest rates benefit more specialized areas of the bond market, such as bank loans.

The Investments Team at Heartland Bank continue to monitor these data points and numerous others on a regular basis. We use this macroeconomic lens to view our portfolios’ tactical asset allocation weighting and to optimize our risk/reward trade-off. The next edition of Investment Insights will cover our view on the trade-weighted U.S. dollar and high-yield bond spreads.

Securities and insurance products are NOT deposits of Heartland Bank, are NOT FDIC insured, are NOT guaranteed by or obligations of the bank, and are subject to potential fluctuation in return and possible loss of principal.

Legal, Investment and Tax Notice: This information is not intended to be and should not be treated as legal advice or tax advice. Readers should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel.