Monthly Markets Memo - July 2017
by Dan Zalipski & Scott Rosenquist, CFA
U.S. Equity indices hit new highs this past month as stocks moved on the back of Q2 earnings. International equities, however, led the way easily outpacing their U.S. counterparts. Emerging Markets were especially strong, helped by a weakening dollar. Fixed income was mixed, with higher yielding and below investment-grade issues outperforming their more conservative counter-parts.
Yields moved higher throughout the month, partially influenced by Europe’s central bank acknowledging that the time to wind down their easing programs may be nearing. Finally, commodities rebounded as oil prices look to stabilize, but remain well off their recent highs from January.
Fed’s Eye on Inflation
The latest read on U.S. inflation has market participants reassessing the Fed’s timing for their next rate increase. The Consumer Price Index, or CPI, is the U.S. Bureau of Labor Statistics measurement of inflation reported monthly. The latest year over year report came in at 1.6%, down from 1.9% the prior month, and well off the 2.7% seen in February, a five-year high. This weakness was acknowledged by Fed Chair Janet Yellen, who indicated the central bank may adjust their future rate increases if the trend persists, but as of now, expect one additional rate increase before year-end.
The market isn’t so sure. The probabilities of future rate increases, as measured by the CME Group's FedWatch Tool, report an 8% chance of a rate increase in September, and a 45% chance in December at the time of this writing. Up until this point, one more rate increase before year-end was all but priced in. Despite the Fed communicating that it will happen, this latest development has investors seeing the odds as no better than a coin-flip. One note worth mentioning, with a rate increase seemingly unlikely in September, it’s possible the Fed may shift its attention to reducing the size of its balance sheet. They intend to carefully manage the unwinding, as to not disrupt the bond market that’s already facing pressure from rising rates.
Despite uncertainty surrounding the Fed’s policy decision, the overall economy continues to grow. Second-quarter GDP is expected to come in higher than the first quarter while manufacturing activity continues to show strength as reported by the ISM Manufacturing Index.
Second-quarter earnings are starting to be released by companies and will be watched closely by investors. The consensus is calling for 7-8% earnings growth in the quarter. The outlook companies provide will also be carefully considered by the market. We continue our cautious lean toward equities over fixed income in this environment of low rates and positive economic growth.
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