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Fed Delivers Expected and Unexpected News

FED DELIVERS EXPECTED & UNEXPECTED NEWS

As Wall Street anticipated, the Federal Reserve raised interest rates on June 14. The Federal Open Market Committee voted 8-1 to take the benchmark interest rate north by a quarter-point to the 1.00-1.25% range. The Fed also said it would begin to reduce its $4.5 trillion balance sheet at some point “this year” by slowing reinvestments. As a start, it will let $6 billion per month in Treasury holdings run off, along with $4 billion per month in agency debt and mortgage-linked securities. This implies upward pressure on long-term interest rates.1,2

      

RETAIL SALES, HEADLINE INFLATION BOTH RETREAT

The Consumer Price Index declined 0.1% in May, noted the Bureau of Labor Statistics; core consumer inflation rose 0.1%. A bigger May decline came for retail purchases – the Census Bureau said that they fell 0.3% even with car sales factored out.3

   

HOUSING STARTS SLIP

The Census Bureau’s new residential construction snapshot showed groundbreaking at an 8-month low, with total housing starts down 5.5% in May. Total building permits decelerated 4.9% last month to their slowest pace since April 2016.4

 

GAUGE OF SENTIMENT DESCENDS

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Mixed Markets. Mixed News.

Markets last week were mixed with leading tech stocks falling dramatically as some investors pulled profits.[i] The NASDAQ took the biggest hit, finishing 1.55% down on the week—its worst week of the year.[ii] Meanwhile, the Dow rose 0.31% for the week, notching another record close on Friday.[iii] The S&P 500 fell 0.30%, and the MSCI EAFE closed the week down 1.22%.[iv]

The S&P tech sector dropped 3.3% on Friday; however, it remained up 18% for the year. Major tech stocks account for almost 13% of the total number of stocks in the S&P 500, while comprising nearly 40% of the S&P 500 increase for the year.[v]

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Stocks Advance, Economy Softens

Last week, the S&P 500, Dow, and NASDAQ closed at all-time record highs.[i] The S&P 500 rose 0.96%, the Dow gained 0.6%, and the NASDAQ grew by 1.54%.[ii] Meanwhile, the MSCI EAFE gained 1.64% for the week.[iii] 

Despite strong equity markets, bond yields dropped to their lowest point in the year.[iv] The drop in yield caused by rising bond prices, combined with soft employment numbers and low wage growth, could suggest a slowing economy or a tightening labor market.[v]

While the U.S. equity markets advanced to new highs and bond prices rose, other markets were mixed for the week. Pending home sales dropped 1.3% in April, a second straight month of decline.[vi] Oil fell to $47.66 a barrel, the dollar dropped to a seven-month low against the euro, and gold gained 0.8% closing at $1,280.20.[vii]

Additionally, soft employment numbers and flat wages could lead to a disappointing Q2 Gross Domestic Product (GDP). With an eye on dropping inflation, the Fed will have to decide whether to still raise interest rates.[viii]

Mixed Job Numbers and Slow Wage Growth

May’s job growth reported an anemic 138,000, well below the expected 185,000. At the same time, average hourly wages increased on a year-over-year basis by only 2.5%. Moreover, the revisions to March and April’s payroll numbers fell by 66,000 jobs.[ix] The economy is currently averaging 162,000 new jobs per month for the year—again, well below 2016’s 187,000 average.[x]

Despite the unemployment rate falling to 4.3%, the lowest it’s been in over 15 years, the employment-to-population ratio also fell. Still, the data confirms that demand for experienced and skilled workers exists, while the supply is falling.[xi]

Fed Will Discuss Raising Interest Rates

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Markets Ignoring Politics

Markets tuned out noise from Washington last week and continued to focus on economic fundamentals. Mildly rebounding retail sales and strong consumer sentiment seem to point toward a modestly stronger second quarter.[i]

After a three-week winning streak, both the Dow and S&P 500 reported slight losses.[ii] The Dow closed with a 0.53% loss, and the S&P 500 reported a 0.35% decline for the week.[iii] The NASDAQ, however, rose 0.34% while the MSCI EAFE reported a modest 0.16% gain.[iv]

MIXED SIGNALS CONTINUE

  • Soft retail earnings

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Strong Markets and Slow GDP

Stocks continued their advance on generally strong earnings reports this week despite the GDP report showing a slow first quarter economy. The S&P 500 rose 1.51%, the Dow gained 1.91%, and the NASDAQ added 2.32%.[1] On Tuesday, the NASDAQ posted record highs as it closed over 6,000 for the first time.[2] Internationally, the MSCI EAFE was up 2.97%.[3]

On Friday, April 28, we learned that first quarter GDP increased a modest 0.7%, lower than

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