Week in Review July 14, 2017
Stocks had their best week in two months last week after Federal Reserve Chair Janet Yellen indicated that the Fed may not be quick to raise interest rates again in the near future in the light of lower than expected inflation and economic growth.
Both the Dow and the S&P 500 closed at record levels on Friday after climbing a respective 1.0% and 1.4% for the week, but NASDAQ once again eclipsed those two indexes, gaining 2.6%. It was the best week for stocks since the middle of May. NASDAQ is now up more than 17% in price so far this year while the Dow and S&P are up nearly 10%. Stocks were up pretty much around the globe, with the Stoxx Europe 600 gaining 1.8%, its best weekly gain since early May. Asian stocks were led by Hong Kong, which jumped 4% and is now up 20% year to date. Bond prices were higher, too, with yields on long-term U.S. Treasury securities falling about five basis points on the week. The benchmark 10-year note closed at 2.33%.
While Yellen expressed confidence that inflation would gradually rise to the Fed’s desired 2% level, she did indicate that short-term interest rates were already pretty close to where the central bank wants them to be. “It’s premature to reach the judgment that we’re not on the path to 2% inflation over the next couple of years,” she said, while adding that she’s keeping an open mind about future rate hikes: “We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent,” she said. But the key phrase in her testimony to the Senate Banking Committee that set off the rally in stock and bond prices was this one: “Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” Traders and investors took that to mean that a rate hike in July is probably off the table, and possibly for September too.
Reports on the U.S. economy released last week justified a dovish monetary policy stance. Retail sales fell for the second month in a row, declining 0.2% last month after falling an upwardly revised 0.1% in May, which was originally reported as a 0.3% drop. The markets had been expecting a 0.1% increase. Inflation was virtually flat last month. The consumer price index was unchanged from May and up only 1.6% versus a year earlier, the fourth straight decline by that measure. Producer prices rose 0.1% for the month and 2.0% compared to last year. The University of Michigan’s consumer sentiment index began July at 93.1, down an unexpected two points from the previous reading. The lone strong indicator of the week was for industrial production, which rose 0.4% in June, slightly better than expected.
Reports/dates/facts/links worth paying attention to over the next week:
1. July 17: New York Federal Reserve Bank Empire State manufacturing survey for July.
2. July 18: National Association of Home Builders housing market index for July.
3. July 19: Housing starts for June.
4. July 20: Weekly unemployment claims; Philadelphia Fed business outlook survey for July; leading economic indicators for June.