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Week in Review: June 25, 2021

Recap & Commentary

Markets ended the week higher with the S&P 500 at a new record high as concerns generated by the prior week’s Fed meeting subsided and a bipartisan group of Senators appeared to strike a deal on an infrastructure bill.

Speaking before the U.S. House of Representatives, Fed Chair Jay Powell indicated that the Fed will not rush to raise interest rates. “We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.” Powell’s comments helped assuage investor concerns sparked by the release of the Fed’s most recent “dot plot” projections showing that the central bank now expects to raise rates twice in 2023 vs. the prior projection of no rate hikes before 2024.

A bipartisan group of Senators appeared to reach a deal on a $1.2T infrastructure deal that would focus on traditional infrastructure including roads, bridges, tunnels, rails, and broadband. While beneficial to economic activity, infrastructure spending does not provide the quick boost similar to the direct payments provided by multiple rounds of coronavirus aid bills. First, there are not enough “shovel ready” projects to immediately spend that amount of money; second, infrastructure spending is a slower process. However, the longer-term benefits of infrastructure spending are arguably more sustainable than direct payments, which tend to pass through the economy rather quickly.

Economic Bullet Points

The housing market continues to show signs of slowing, even as pricing remains strong. Both existing and new home sales fell modestly in May, hampered by limited inventory.  New homes sales were also impacted by shortages of land, labor, lumber and other raw materials. Compared to a year ago, existing and new home sales increased 24% and 9%, respectively.

Core PCE inflation, the Fed’s preferred measure of inflation, rose 3.4% on an annual basis, the fastest pace since April 1992.  Now well above the Fed’s long-term target of 2%, it remains to be seen how long the Fed will let inflation remain at these levels. For now the Fed appears more focused on the employment part of its dual mandate, meaning it is likely to tolerate higher inflation for the time being, especially as it continues to believe the current surge in prices will most likely turn out to be temporary.

Personal income declined 2% in May, following a 13% decline in April, as the benefits of the most recent round of coronavirus stimulus continued to recede.  Overall, spending for the month was flat. However, consumers continued to shift their spending from goods to services with the former decreasing 1.3%, while the latter increased 0.7%. This was evidenced by a 16% increase in spending at restaurants by households with incomes greater than $200K.

Durable goods orders disappointed to the downside, particularly core business orders which slipped 0.1% compared to the prior months 2.7% increase. Supply chain bottlenecks and a shortage of workers were the primary culprit.

Of Note

All 23 banks subject to the Fed’s most recent stress test passed. As a result, they are no longer bound by the Fed’s pandemic restrictions related to returning capital to shareholders. In turn, many are expected to accelerate both dividends and share buybacks in the coming months.

Market Indices Week of 06/25

S&P 5002.7%
Small Caps4.3%
Intl. Developed1.5%
Intl. Emerging1.4%
Commodities1.7%
U.S. Bond Market-0.4%
10-Year Treas. Yield1.52%
US Dollar-0.5%
WTI Oil ($/bl)$74
Gold ($/oz)$1,777

The Week Ahead

  • June Employment Report
  • ISM Manufacturing
  • Consumer Confidence
  • Pending Home Sales
  • Weekly Jobless Claims

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