The Week Ahead – Anti-Bubble Policy

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

A couple of weekends ago, I took my kids to Bubblefest XXIII at the Discovery Cube in Orange. Tickets sell out quickly, so this was the first year we were able to attend. Kids love bubbles, and this show did not disappoint with high energy music and an amazing display of bubbles of all shapes and sizes. The brother and sister team of Deni and Melody Yang do an amazing job of blowing bubbles to the delight of their audience.

Blowing bubbles is exactly what the Federal Reserve was trying to prevent by slowly raising interest rates. Despite raising interest rates nine times since 2015, the Fed Funds Rate remains at a relatively low range of just 2.25% - 2.50%. Last year the Federal Reserve was forecasting an additional four hikes for 2019, which helped send the stock market into a tailspin. Since walking back this counter-cyclical monetary policy, asset prices have resumed their upward trajectory with the stock market breaching in highs and the housing market showing signs of picking up. We also saw an impressive 3.2% print for first quarter GDP, surprising all but the most optimistic economists. Adding to this narrative of surprising to the upside, Friday’s jobs number was another blowout statistic with 263,000 jobs added vs. 190,000 expected.

With the economy firing on all cylinders and inflation running low, despite nine months of decent wage growth, the Federal Reserve can keep rates low and perhaps even allow the economy to run hot (above trend) for a while. This would be very supportive for risk assets such as stocks and real estate. However, you can be sure that should inflation start to show up in the data, or significant asset bubbles form; the Fed will restart its campaign of hiking interest rates.

This week we will be keeping a close eye on the trade deficit statistic to be released on Thursday. This key statistic has been a sticking point to the resolution of the trade deal with China, and was a big factor in the strong GDP report we saw on April 26^th.

Data deck for May 6-May 10: