The Dow Jones Industrial Average reached new highs, closing above the 27,000 mark for the first time last week. The S&P 500 also hit a milestone, closing above the 3,000 mark. Although large caps were slightly positive for the week, all other major equity indices were down. The current US economy is in its longest recorded expansion in history, now aged more than a full 10 years and still going. This expansion has been different in many respects, notably with a lower average GDP growth rate of 2.3% since the current expansion began in Q3 of 2009. The average GDP growth rate for prior expansion periods since 1948 was 3.8%. Furthermore, interest rates were effectively held at 0% for 7 full years (Dec 2008 – Dec 2015) following the recent recession, leading to the current low interest rate environment and an extremely flat yield curve compared to other economic expansions.
J. Powell’s testimonies before the US House and Senate reiterated the Fed’s outlook of solid growth, strong labor markets, and increasing inflation, but also recognized increasing uncertainties. A standout point included an admission that both the neutral interest rate and natural unemployment rate are lower than previously thought, leading to recent policy that has been less accommodative than intended. Whether the Fed intends to correct this with a more accommodative stance remains to be seen, but nonetheless market participants widely are expecting a rate cut at the July 31 FOMC meeting. The Fed certainly can make an argument for lowering interest rates given a lower neutral interest rate than prior periods and slack in the natural unemployment rate.
Core CPI and PPI showed a pickup in inflation, with both measures above 2%. The Fed’s preferred inflation gauge is PCE (personal consumption expenditures) and increasing CPI/PPI can be a positive sign of PCE increasing toward the Fed’s 2.0% goal. Inflation below this goal is one factor that has led to the Fed’s intended “patient” and accommodative stance since first hiking in December 2015. The Fed certainly can make an argument for holding interest rates given seemingly increasing expectations of inflation and the Fed’s positive economic outlook.
This week should be busier in terms of market movers. We likely will see a shift in focus to corporate performance as earnings season comes into full swing. Plenty of indicators also will be released, ranging from Retail Sales to Business Outlook Survey to Consumer Sentiment.
 Bloomberg, LLP
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