Investors Keeping an Eye on Global Events this Week

Another soft inflation report complicates the path forward for the Federal Reserve. Last Friday’s Consumer Price Index (CPI) report showed no change in June, leaving the twelve-month rate at just 1.6 percent. The core rate rose by 0.1 percent for the month and sits at 1.7 percent for the past twelve months. While not the Fed’s preferred inflation gauge, the CPI is another indication that prices are not rising as fast as the Fed would like, nor likely as fast as it expects. The dovish voices on the Federal Open Markets Committee (FOMC) will grow even louder when the Fed meets next week, raising the possibility of no rate hike in September.

Lack of Wage Growth and Inflation Could Give the Fed Pause

The U.S. economy generated 222,000 new non-farm jobs in June, well above the expected 175,000. It was the best showing in four months. The report also included a 47,000-job upward revision to the prior two-month total. While the unemployment rate rose to 4.4 percent from 4.3 percent in May, it was accompanied by a modest increase in the participation rate. However, the report also continued to confound expectations of rising wages this late in the cycle. For the month, average hourly wages rose just 0.2 percent, and just 2.5 percent on a trailing twelve-month basis. The combination of solid job growth and little inflationary pressure should be supportive of risk assets.

Central Bankers Causing Some Anxiety in Markets


As the second quarter drew to a close, central bankers were doing a lot of talking, and causing some anxiety in the process. In particular, comments by European Central Bank (ECB) President Draghi, citing economic progress in the Eurozone, were construed as preparing markets for the eventual winding down of its bond buying program, as a first step toward its policy normalization. The current program is scheduled to run through the end of the year. Currency markets reacted immediately, pushing the euro to a nine-month high versus the dollar. However, it didn’t take long for the bank to make it clear that those comments had been misinterpreted, that no such hawkish shift was intended.

Beyond Healthcare…Tax Reform is Top of Mind for Investors

The week ahead may have a lot to say about the success of the Trump administration’s proposed legislative agenda, and the market’s reaction to it. The Senate leadership is pushing for a vote on its version of a healthcare overhaul. The draft replacement for the Affordable Care Act can afford only two holdouts among the ranks of Republicans, and that looks to be a stretch at this point. Some conservative republican senators believe that the bill doesn’t go far enough, while some moderates believe it goes too far in rolling back coverage. This leaves the bill’s prospects uncertain. Compromise will not be easy. Every concession intended to satisfy conservatives risks alienating moderates, and vice versa.