Playing the “Economic Card”

Timothy D. Carkin, CAIA, CMT Senior Vice President

The circus of two political party conventions and some big economic news did not sway the markets this week. Domestic equity markets remained relatively flat even with the S&P 500 setting another intra-day high. International equity markets fared much better by rising 1.7 percent. The U.S. 10-year Treasury rate fell slightly to 1.46 percent. The U.S. dollar sold off two percent on European and Japanese news.

Fed keeps rates the same

In a widely anticipated decision the Fed met Wednesday and resolved to keep rates the same. Keying in on a strong job market and robust home sales, they left on the table the possibility of another rate hike this year. Noteworthy was the additional Fed comment, “near-term risks to the economic outlook have diminished.” After a strong run in the markets, near full employment and rising housing markets, it is easy to see risks diminish. Slowing in European and Asian economies probably prevented a more hawkish statement.

Bank of Japan underwhelms

Japanese Prime Minister Shinzo Abe announced a 28 trillion yen economic stimulus package Wednesday. Two days later, the Bank of Japan met and their announcement was disappointingly benign. The Bank of Japan did not change rates nor did they expand their bond purchase program. Rather, they nearly doubled their ETF purchase plan raising it to six trillion yen a year. Interestingly, they did announce they will conduct a “comprehensive assessment” of its policy framework due to considerable uncertainty in their outlook. This sent the yen soaring relative to the dollar.

Second quarter GDP also underwhelms

The first look at the second quarter Real GDP was disappointing, posting an annualized increase of 1.2 percent. This was not the number the Fed or the market was expecting. Consensus was more than twice that: 2.6 percent. Adding further to the disappointment the final first quarter GDP growth rate was revised down from 1.1 percent to 0.8 percent. The high point from this report was personal consumption which increased 4.2 percent. The inventory component dropped 1.2 percent. This was a drag on the second quarter but should be a benefit in the third quarter as companies restock their shelves. This reading might be a bump in the road for U.S. economic expansion. The U.S. economy is still growing, but at a slower rate.

Our Takeaways for the Week:

  • Japan will be the first test case in the developed markets for a shift from monetary to fiscal policy (Source: Strategas Research Partners)
  • Fed left the door open for another rate hike this year but anemic GDP readings like we saw this week make a hike hard to rationalize.