Baker Market Update – wk210730

As we close another hot July week, eyes were on this morning’s release of an inflation indicator the Federal Reserve uses as its key guide, the personal consumption expenditures price index. The core personal expenditures price index, which excludes food and energy, increased 3.5% year-over-year, slightly below expectations of 3.6%. On a month over month calculation, the core PCE index rose 0.4%, which was below the 0.6% estimate, potentially indicating that inflationary pressures may be starting to subside at least a bit.

New consumer spending data was also released this morning and it rebounded 1.0% last month after dropping 0.1% in May. While consumer spending on goods remains strong, the pace has slowed amid shortages of motor vehicles and some household appliances, whose production has been constrained by a shortage of semiconductors worldwide. Additionally, personal income increased unexpectedly 0.1% after falling by a revised 2.2 percent in May.

Earlier in the week, the Federal Reserve wrapped up their two-day meeting on Wednesday and updated the world on their thoughts about inflation and employment in the United States. The central bank decided not to raise interest rates from near zero nor adjust the pace at which it buys government bonds each month. Investors hang onto every word Chairman Jerome Powell speaks during his post Fed meeting press conference and Powell said, “The U.S. economy is still a good deal away from making substantial further progress” toward the Fed’s dual mandates of stable prices and maximum employment. Additionally, Powell stated, “I’d say we have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal.” Some analysts have questioned why the Fed is buying billions of mortgage-backed securities each month at a time when home prices have surged. Powell states that he didn’t think the purchases of those assets had a significant impact on the housing market outside of the broader accommodative approach from the central bank.

The first estimate of U.S. gross domestic product was released Wednesday and the U.S. economy rose at a disappointing rate in the second quarter of 6.5% on an annualized basis. Yes, you read that correctly, I said disappointing as expectations were much higher at 8.4%. With the impact of fiscal stimulus waning, surging prices, and the delta variant running throughout the country, many are expecting GDP growth to slow in the second half of this year.

In taking a look at the markets this morning, the 10-year Treasury yield is down this morning to 1.23% and yields across most parts of the curve are also down slightly. The Dow Jones Industrial Average is off slightly this morning, down around 100 points.

Next Friday brings monthly job and employment data for the month of July. Estimates are for an increase of 850,000 in nonfarm payrolls and a headline unemployment rate of 5.9%. Early next week we will get the updated ISM manufacturing index as well as the ISM services index. Stay safe!

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Dale Sheller

Senior Vice President
Financial Strategies Group
The Baker Group LP

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