The Week Ahead – Reflections: Looking in the Mirror

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

Investors have kept their eye on the prize (See: The Claw Machine) through earnings season and just this week we saw the Dow Jones Industrial Average setting a new high as it broke through 22,000. We’re now wrapping up week four of earnings season, and data is still coming through, but so far after week three, we saw 70% of S&P 500 2Q earnings come in 2% above analysts’ expectations. Another nice surprise has been the more optimistic guidance from management (Washington policy gridlock aside). It’s nice to see the market rewarding fundamentals. As our Chief Investment Officer noted in our most recent quarterly piece (See: A Not-So-Lonely Planet), the U.S. isn’t the only region capturing this phenomena.

Looking ahead to next week, a few events stand out: the Federal Budget Balance & the Consumer Price Index data. The Federal Budget will require lawmakers to take a hard look in the mirror. The Congressional Budget Office reported last week that the debt ceiling limit could be reached by mid-October and current budget spending shows a $10 trillion addition to federal debt over the next 10 years. Rising interest rates could make it even more difficult to chip away at the debt. President Trump’s administration will have to walk a fine line as they look to implement an infrastructure program and proposed tax cuts while seeking savings elsewhere.

Inflation, inflation, inflation. The key piece of data which has kept the Fed cautious. Both the Personal Consumption Expenditures (PCE) and the Consumer Price Index (CPI) are measures of inflation that the Fed looks at it. CPI peaked most recently in February of this year and has trended down ever since. A better reading for July could signal that the Fed can remain on course for the rate hike in December as well as the three hikes laid out via the dot plot in 2018. The FOMC singled out wireless telecom as transitory for inflation at their most recent meeting, however, other sectors, like autos, may be putting additional downward pressure on prices. While this morning’s employment report came in very strong, adding 209,000 new jobs in July and bringing the unemployment rate back down to 4.3%, wage growth continues to be muted at 2.5% over the last 12-months. Wage growth should eventually translate into inflation as long as the labor markets continues to remain tight.  

Data deck for August 5-August 11: