Most asset classes were higher last week as markets seem to be looking past the Fed's rate forecasts.
Market sentiment last week focused on the release of June inflation data. The Consumer Price Index and the Producer Price Index both declined more than expected on a year-over-year basis. Key items in the report such as meat, poultry, fish, and eggs showed declines year-over-year. In fact, inflation at 3.0% is now below the historical average of 3.5%. The Fed’s Beige Book data further showed that businesses are hesitant to raise prices much further due to consumers who are already sensitive to prices.
And yet, the Fed futures show that a 25 basis point rate hike is likely at the next meeting on July 26th.
Declining prices could offset another rate hike or two. The key will be how does the consumer respond. This week’s release of June Retail Sales will provide further insight, but last week’s preliminary release of Consumer Sentiment showed the highest reading in nearly two years. The Fed’s own estimate of 2nd quarter GDP was revised higher last week. Their estimate currently shows +2.3% growth in GDP versus the low of +1.6% just a few months ago. Corporate earnings will be eyed this week to determine if current market valuations are justified. Fed comments will be limited this week as they go into “blackout” before next week’s meeting.
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