Small Business Optimism Highest in Nearly 4 Decades, says NFIB

The 1980s did more than breed questionable fashion, great music and big hair; it was also an age of entrepreneurship as the nation saw 17 million small businesses open their doors with an air of unmatched optimism … until now.

Banking on expectations about where the economy is heading under the leadership of businessman and President-elect Donald Trump, America's small businesses are operating with revitalized confidence in the future of their brand.

In December, The National Federation of Independent Business' (NFIB) index jumped 7.4 points to 105.8, the highest mark since reaching 98.4 at the end of 2004. While seven of the 10 components increased in December, 73% of the monthly gains was fueled by optimistic outlooks for sales and the economy, the Nashville-based group reported.

Based on a survey of 619 small business owners, NFIB's data also shows that the number of business owners who say now is a good time to expand is triple the average of current expansion. Also, more companies said they plan to increase investment and keep hiring on anticipation that the Trump Administration will boost the economy through deregulation, tax reform and infrastructure spending.

"Rising confidence adds to the economy's upward momentum. At the same time, the NFIB membership appears to be disproportionately Republican, so it is possible that the data will start overstating strength, opposite the pattern during the Obama administration," Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said in a note.

Additionally, 50% of respondents said they expect better business conditions in the next six months, a position 38 percentage points higher than in November. Companies are also more optimistic about their financial performance, with the net share of firms projecting higher sales up 20 points to 31 percent.

"We haven't seen numbers like this in a long time," Juanita Duggan, president and chief executive of the NFIB, said in a statement. "Small business is ready for a breakout, and that can only mean very good things for the U.S. economy. Business owners are feeling better about taking risks and making investments."

Small companies – defined as an independent enterprise with fewer than 500 employees - currently represent more than 99% of all U.S employers, according to the U.S. Small Business Administration.

Richmond Fed President Announces Retirement, Effective in October

Jeffrey Lacker, president and chief executive officer of the Federal Reserve Bank of Richmond, announced his retirement on Tuesday, effective October 1, 2017. The decision marks the second announced departure from the Fed since September 2016, when Atlanta Fed President Dennis Lockhart announced that he will be stepping down on February 28.

Lacker has spent 28 years with the Richmond bank and currently serves as a nonvoting member of the Federal Open Market Committee. Notably, the Richmond district president will gain a voting position in 2018.

"It's been an honor to serve the Federal Reserve," Lacker told reporters following the announcement. "I feel fortunate to have spent time throughout the Fifth District learning first-hand about people's economic experiences, and to have participated in some of the most extraordinary policy deliberations in our nation's history. It's been my deepest privilege to lead the Richmond Fed and the dedicated people who work here."

Originally joining the Richmond Fed in 1989, Lacker served in a variety of leadership positions ahead of his appointment as president in August 2004. He was also an assistant professor of economics at Purdue University's Krannert School of Management, in addition to working at Wharton Econometrics in Philadelphia.

Looking toward the future, Lacker highlighted President-elect Donald Trump's fiscal stimulus plans as a key factor in near-term interest rate hikes. He indicated that the Federal Reserve may need to raise rates quicker than markets currently predict if these plans provide a significant boost.

"Monetary policy rates are likely to increase, and my view is that they may need to increase more briskly than markets appear to expect, depending on developments as the year unfolds," Lacker added.

Following Lacker's announcement, the Richmond Fed's board of directors outlined plans to form a search committee in order to find his successor.

Janus Capital's Bill Gross Warns of Implications if 10-Year Note Rises

While most of us with an interest in the financial markets were cheering the Dow's performance earlier this week, prominent bond investor Bill Gross had his eyes on the 10-year Treasury note. The present manager of Janus Capital's global unconstrained bond fund was quick to issue his warning of what will happen if the 10-year not climbs above its current level.

President-elect Donald Trump's win over Hillary Clinton in November triggered a bond sell-off that pushed the yield on the benchmark 10-year Treasury note to around 2.60% in December up from a low of 1.36% in July.

Gross warns that while falling bond prices have somewhat abated, the 10-year yield remains a key factor in the financial markets. An even higher 10-year note, for example, would usher in the end of the bull market in bonds, unleashing huge implications for broader markets.

On one hand, increasing yields (which equates to falling bond prices) would negatively affect stocks that in recent month have made gains on optimism that Trump will hold to his campaign promises, such as increased fiscal spending and tax cuts. High yields would make the security of bonds more attractive to buyers of comparatively risky stocks. Additionally, these proposals lend weight to inflation, which erodes the value of fixed-interest payments. In the housing industry, higher rates mean more expensive mortgages and higher corporate borrowing costs.

"And this is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017," said Gross, according to a recent article on MarketWatch.