The big news last week was the positive surprise in second quarter GDP growth being up 2.4% (annualized) with the Personal Consumption Expenditures inflation index continuing to fall. The Fed increased its policy rate by ¼% and stock markets closed higher.
- As expected, the Fed raised its Fed funds rate target range to a 22-year high of between 5.25% and 5.50%, and indicated it remains biased to further tightening until incoming data show further, continuing disinflation.
- Futures markets suggest no more Fed rate hikes in this cycle, however, and before the next Fed FOMC meeting there will be two months of inflation and employment reports.
- Last Friday’s PCE inflation report showed that the core PCE price index rose by a modest 0.2% m/m in June, with 12-month core inflation falling from 4.6% to 4.1% — the lowest in 2 years — reflecting a moderation in both goods and services inflation.
- Second-quarter real GDP grew at a 2.4% annualized rate, which together with 2% growth in the first quarter means the economy expanded at close to its potential pace over the first half of the year.
- The positive 2.4% second quarter GDP is good news, even with consumer spending having fallen from 4.2% in Q1 to 1.6% in Q2. Offsetting this, business investment increased from 0.6% in Q1 to 7.7% in Q2, and inventories increased 9.3%.
- This coming Friday will provide the July employment and wage growth report, with positive but lower job and wage gains likely and no expected change in the unemployment rate which currently is 3.6%.
Financial markets remain buoyed by better-than-expected corporate earnings and positive business spending and investment.
- The S&P closed last Friday up: 0.85% for the week, 2.96% for the month and 19.82% YTD.
- Second quarter S&P 500 earnings are reporting better than expected with a greater than average number of positive earnings surprises. The year/year decline in earnings per share is below average and the outlook for earnings over the next six months is positive.
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