The Week Ahead – California Dreamin’

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.

“All the leaves are brown (all the leaves are brown)
And the sky is grey (and the sky is grey)
I've been for a walk (I've been for a walk)
On a winter's day (on a winter's day)
I'd be safe and warm (I'd be safe and warm)
If I was in L.A. (if I was in L.A.)

California dreamin' (California dreamin')
On such a winter's day”

-California Dreamin’ – The Mamas and the Papas

California, with over $2.7 trillion GDP, is now back in the world’s top five largest economies, surpassing the United Kingdom in 2017 (Thanks, Brexit!). The last time California was in the top five? Way back in 2002 and during the Great Recession, dropping all the way to 10^th in the world. The current global top four? The United States, China, Japan, and Germany. California’s nominal GDP growth in 2017 increased by $127 billion with financial services/real estate leading the pack with $26 billion in growth, followed by the tech sector up $20 billion, and manufacturing up $10 billion.

This past week we saw the Fed hold rates steady at 1.50-1.75%. However, the most interesting part was the news that their inflation target of 2% was “symmetric”. What does this mean for investors? Simply that the Fed has been comfortable with inflation being below their target and is now implying that they would be comfortable allowing inflation to exceed their target. Dovish language. We also saw April’s employment report reflect unemployment decreasing from 4.1% down to 3.9%. The last time unemployment was below 4% was in 2000 under President Clinton. Not all the news was great, as nonfarm payrolls came in below market expectations, suggesting that employment could be slowing. That pesky wage growth which everyone freaked out about in February (remember those days?) showed that average hourly earnings increased by only 0.1% to a year-over-year rate of 2.6%. After digesting the employment data, the market is now pricing in a 100% chance of a rate hike at the Fed’s June meeting.

After last week’s flood of economic data, the week ahead will be relatively quiet with the Consumer Price Index as the highlight for investors. Speaking of last week, say goodbye to those April showers as the weather forecast for the week ahead is low 80’s. California Dreamin’.

Data deck for May 5 – May 11: