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Week in Review: July 17, 2017

What's Important

S&P 500 hit all-time highs on dovish testimony from Fed Chair Yellen and mild inflation numbers


Yellen ’s testimony emphasized the strong labor market and her expectation that low inflation will be transitory



U.S. stock and bond prices ended the week strong, with the S&P 500 closing at a record high. Global stocks (as defined by the MSCI ACWI) were up 2%. Investors shrugged off downright disappointing retail sales numbers after weaker-than-expected CPI data showed the Fed has room to be patient when it comes to normalizing interest rates. Bond prices started to rise after Yellen’s Congressional testimony where she said the Fed might slow its tightening pace if inflation stays low, but it believes inflation will not stay low. The bond market read the inflation conditions differently, as evidenced by the decline in the 10-year Treasury yield (bond prices and yields move in opposite directions).


Equities Continue to Rise Although Retail Sales Disappoint


Inflation reports suggested that inflation may have peaked in early 2017 and continues to fall though midyear. The June Consumer Price Index was a little lower than expected with the headline number unchanged while the core number rose by only 0.1%. On a year-on-year basis the headline fell from 1.87% to 1.65% and the core fell from 1.74% to 1.71%. These recent releases coupled with the tepid wage growth figures from last week point to slowing inflation.

Federal Reserve Chairwoman Janet Yellen said in testimony to Senate Banking Committee that a strong labor market and rising prices of imported goods supported her expectation that the recent downturn in inflation would prove transitory. Yellen said “I think it’s premature to conclude that the underlying inflation trend is falling well short of 2%. I haven’t reached such a conclusion.” Those remarks reminded traders that inflation’s upward path remains an uncertainty in the Fed’s rate policy.  

The disappointing economic news of the week was found in the retail sales report. June retail sales fell by 0.2% and sales ex-autos and gas was down 0.1%. Consumption was weak so far this year as evidenced by first quarter retail sales growth at 4.2% and Q2 just under 1.0%. These numbers argue against further rate hikes if the Fed stays data dependent. These weak reports plus tepid inflation measures prompted the market to come up with its own conclusion on inflation and the Fed Funds futures market has the probability of a December rate hike at about 44%.  

 

Market Returns (USD)

ADA Table Caption

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

2.1%

1.9%

13.6%

17.4%

S&P 500

1.4%

1.6%

11.0%

16.1%

Dow Jones Industrial Average

1.0%

1.4%

10.9%

19.9%

NASDAQ

2.6%

2.8%

18.0%

26.9%

Russell 2000

0.9%

1.0%

6.0%

20.5%

MSCI EAFE

2.4%

1.9%

16.0%

19.1%

MSCI Emerging Markets

4.6%

3.9%

23.1%

23.7%

Hard Assets

MSCI US REIT

1.3%

-0.1%

1.9%

-4.7%

Alerlan MLP

1.9%

2.1%

-0.6%

1.1%

Bloomberg Commodity Index

1.1%

0.2%

-5.1%

-4.5%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.3%

0.2%

2.8%

0.4%

Bloomberg Barclays Intermediate Government/Credit

0.4%

0.2%

1.9%

0.0%

Bloomberg Barclays High Yield Bond

0.5%

0.3%

5.2%

10.0%

JPMorgan GBI Emerging Markets Global Diversified

2.6%

1.1%

11.6%

6.0%

Market Levels

ADA Table Caption

Friday

Week Ago

Year End

Year Ago

S&P 500

2,459.27

2,425.18

2,238.83

2,163.75

Dow Jones Industrial Average

21,637.74

21,414.34

19,762.60

18,506.41

10-Year U.S. Treasury Yield (Constant Maturity)

2.33%

2.39%

2.45%

1.53%

Gold ($/oz)

$1,228.70

$1,212.46

$1,147.50

$1,329.34

Crude Oil ($/barrel)

$46.54

$44.23

$56.90

$50.99

U.S. Dollar / Euro ($/)

1.15

1.14

1.05

1.11

U.S Dollar / British Pound ($/£)

1.31

1.29

1.23

1.33

Japanese Yen / U.S. Dollar (¥/$)

112.53

113.92

116.96

105.35