The Week Ahead – Economic Exceptionalism

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.

Happy July 4^th! As we celebrate the birthday of our great nation, we should remember that the United States of America truly is an exceptional country. The American spirit of entrepreneurism has helped spawn the world’s greatest companies: Apple, Microsoft, Amazon, etc. started right here. Our political and economic system that fostered these incredible engines of wealth and prosperity deserve reverence and gratitude. Many other countries have tried to emulate the American model of business, but thus far; The USA is the star when it comes to economic exceptionalism.

The market has rallied strongly off the October 12th low for a number of reasons. But I would argue amongst the most salient is the belief that the Federal Reserve appears to be nearing the end of its campaign to slow growth and mitigate inflation. Raising interest rates 525 basis points (5.25%) in a year and a half is unprecedented. It is stunning how well businesses and consumers have delt with this economic shock. Indeed, the United States has had the fastest post-pandemic growth of any economy in the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States). Further, Gross Domestic Product (GDP) growth for the first quarter was recently revised up – going from 1.1% to 2.0%. Particularly surprising has been how resilient housing has been. Homebuilders are selling houses as quickly as they can finish construction despite mortgage rates more than doubling. One could make a strong case the economy may not be as interest rate sensitive as it used to be.

There have been a lot of strong economic data of late. However, many economists are forecasting job growth to taper. This Friday’s employment report is expected to show the creation of just 195K jobs. That would pale in comparison to the 339K new jobs reported in May. The consensus among economists is for the unemployment rate to move from the historically low rate of 3.4% up to 3.7%. While layoffs are sad news, the market is likely to be pleased with these results as some forecasts are stating the Fed can probably hike just once more before looking to ease as early as next year. So far, the data show the Fed is in the process of successfully engineering a soft landing in a way few expected. If they can continue to rid the economy of inflation and avoid a recession – the so-called immaculate disinflation, Jay Powell could possibly go down as the greatest Fed Governor since Paul Volker.

Data Deck for July 3 –July 7: