Reduced GDP Estimates Might Keep the Fed on Hold

Equity markets posted their third straight week of gains, which hasn't happened since February of this year.  Factors supporting risk markets last week included a relatively encouraging beginning to third quarter earnings in U.S. and Europe as well as reduced expectations of a Fed rate hike this year.  FactSet reports that U.S. earnings are on track for -4.6%, whereas -5.1% was expected coming into earnings season.  Excluding the energy sector, earnings are projected to post modest single digit gains.  Two Fed Governors challenged Chairman Yellen's recent assertion that the Fed remains likely to hike rates this year.  Equity market rallies on a 'no Fed hike due to economic weakness' narrative seem to be losing steam recently in recognition of what weak economic fundamentals mean to the markets. 

Third quarter GDP estimates have been reduced by most forecasters to the 1%-1.5% range.  High profile economic reports on the week included anemic inflation (0% headline CPI) and soft retail sales reports mostly due to low energy prices and gasoline sales.  Treasury yields and credit spreads both fell slightly on the week.  Over a longer look back both high yield and investment grade credit spread have risen to 624 and 173 over comparable U.S. Treasuries, up from 450 and 135 earlier in the year.  Lower inflation expectations are reflected by 10yr and 5yr breakevens falling to 1.5% and 1.15% respectively.

Note: Returns are shown in percent and include income. The information is sourced from Bloomberg L.P. While this information is thought to be reliable, Taiber Kosmala & Associates, LLC does not guarantee its accuracy and assumes no responsibility or liability for its use.

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