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Week in Review

Week Ending: Friday, June 15, 2018

Recap & Commentary

Markets ended the week on a down note following news that the U.S. was moving forward with tariffs on $50B of Chinese goods. In response, China said it would immediately levy counter-tariffs on agricultural goods, aircrafts, and automobiles.  Outside of trade-related headlines, markets were focused on global monetary policy.

On Wednesday, the U.S. Fed raised rates by 0.25% to a range of 1.75%-2.0%, citing an improving economy and strong labor market. The Fed also updated its interest rate forecast, commonly referred to as the “dot plot”, which showed the bank expects to raise rates two additional times in 2018 for a total of four increases this year. Markets currently expect the remaining hikes to occur in September and December.

On Thursday, the European Central Bank (ECB) announced plans to phase out its stimulus over the final three months of 2018. At the same time, the ECB indicated that it would keep key interest rates, currently at 0% or below, unchanged until the summer of 2019.  With this announcement, the ECB managed to deliver a “hawkish” message–the end of QE–with a “dovish” spin–maintaining current rates for another year–without triggering the type of “taper tantrum” reaction that markets had in 2013 when the Fed first broached the idea of scaling back its stimulus.

On Friday, the Bank of Japan (BOJ) announced no changes to its current monetary policy. Unlike the Fed and ECB, which are moving to tighten monetary policy, the BOJ is not expected to change its current aggressive stimulus in the near-term.

Economic Bullet Points

Small Business Optimism rose in May to the second highest level in the NFIB survey’s 45-year history, which comfortably exceeded consensus expectations. Within the survey, optimism was broad-based with 8 of 10 index components showing improvement, largely in reaction to the recent tax cuts and easing regulation.

InflationConsumer prices (CPI) increased a seasonally adjusted 0.2% Y/Y to 2.8%, the strongest reading since February 2012 when inflation was 2.9%. Experts suggest that inflation is edging higher, but not surging, led by higher gasoline prices. Excluding volatile energy and food prices, core consumer inflation also rose 0.2%,  signaling a broader increase in prices. Likewise, Producer prices (PPI) increased 0.5% Y/Y to 3.1%, firming an overall inflationary trend driven by higher energy prices, increased threats and the imposition of tariffs, and reduce labor market slack.

Jobless Claims remain very low and are consistent with a low unemployment rate and strong job growth. Claims decreased by 4K to 218K, versus the 224K expectation.

Retail Sales soared 0.5% to $502B, marking the biggest jump since November. Low unemployment, rising wages, and tax cuts were cited as causes for the increase.

Industrial Production dropped an unexpected 0.1% in May due in part to a fire at a major Ford Motor Co. supplier. Economists forecasted a 0.2% increase.

Consumer Sentiment narrowly beat economist estimates, but sentiment for the future decreased, possibly due to concerns about tariffs and rising gas prices.


Of Note

The Department of Labor’s (DOL) “fiduciary rule”, which required investment professionals offering retirement advice to place their clients’ interest ahead of their own, officially expired on Wednesday. Its end was all but assured when the DOL failed to ask the Supreme Court to hear an appeal of an appellate court ruling that voided the rule. The rule had originally gone into partial effect last June.

Market Indices Week of 6/15

S&P 500                           0.0%

Russell 2000                   0.7%

MSCI EAFE                    -0.5%

MSCI EM                        -1.9%

Commodities                -2.5%

Barclay’s Agg.                 0.1%

US Dollar Index              1.3%

10-Yr Yield                     2.92%

WTI Oil ($/bl)                   $65

Gold ($/oz)                   $1,285

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • Current Account
  • Jobless Claims
  • Leading Indicators
  • Philly Fed Business Outlook

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