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The Weekly Economic & Market Recap    

July 20, 2018  

Investors were heavily focused midweek on Fed Chairman Powell’s testimony before Congress. According to the most recent FOMC statement, “economic activity has been rising at a solid rate” with the consumer showing renewed signs of strength and business fixed investment increasing strongly. With inflation (annualized Core PCE index) running at 2%, there was concern that Chairman Powell would indicate a more hawkish monetary policy tone. The domestic markets reacted well after digesting Chairman Powell’s comments and his continued commitment to gradual rate increases moving forward. Even though the current unemployment rate is running 50 basis points (bps) below the Fed’s longer run projection, there still appears to be some slack in the overall labor market as average hourly earnings are up only 2.7% on a yearly basis. Possible reasons for the muted overall wage growth given the low unemployment rate may be due to the deflationary impact of evolving technology and new entrants to the labor force who were not previously counted as unemployed. However, given that monetary policy is still considered accommodative, we do expect the labor market to tighten further and it will prompt the Fed to raise interest rates. At this juncture, the Fed funds futures market shows the December of 2018 contract trading at 2.21%, which indicates the Fed will increase rates 25 bps roughly 1 to 2 more times this year. One of the major risks to the previous prediction is if the trade war with China escalates and the Chinese economy decelerates more rapidly than expected. Right now the default cycle in China is ramping up and the Shanghai Composite is in a bear market, but China is beginning to loosen monetary policy to combat its current headwinds.

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