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Week in Review

Week Ending: Friday, December 15, 2017

Recap & Commentary

The market continued to ride the wave of anticipated tax reform to new highs.

With only five days until its Christmas recess, Congress is racing to pass tax legislation and a budget resolution. The latter is necessary to avoid a partial government shutdown which would take effect on Saturday. Given the time constraints involved, Congress will most likely end up passing a short-term resolution, similar to the one passed earlier this month, and then revisit the topic in the new year.

Having appeared to secure the necessary votes for its proposed tax legislation, Congress is expected to begin voting as early as Tuesday and appears poised to approve the final bill by Wednesday. President Trump is expected to immediately sign it into law.

Largely overlooked was the Fed’s widely anticipated decision to raise the Fed Funds rate by 0.25% bringing it to 1.25-1.50%. Looking forward, the Fed maintained its forecast for an additional three hikes in 2018 and 2019. Additionally, the Fed increased its 2018 GDP projection from 2.1% to 2.5% to reflect the near-term benefits of Congress’ proposed tax reform. However, the Fed left its long-term projection of 1.8% unchanged in anticipation that the tax overhaul will have little impact on longer-term growth.

In Europe, the ECB left both its benchmark interest rate and bond-buying program unchanged while increasing its 2018 economic growth from 1.8% to 2.3%. In China, the PBOC increased its benchmark rate by 0.05%. While relatively small, the increase was the first since March and was viewed by many as a surprise. Looking back, 2017 may well be remembered as the inflection point where major central banks took steps or signaled their intention, to begin normalizing monetary policy.

Economic Bullet Points

Small business owners appear to be feeling optimistic about 2018, according to the NFIB Small Business Optimism Index which saw increases in 8 of the 10 components. Sentiment improved meaningfully, suggesting employment growth and fixed business investment should maintain strong momentum moving into 2018. Business Inventories are growing thin as the economic pace builds. Low inventories will help to keep prices firm, in turn helping to lift inflation.

Regional factory data, reflected by the Empire State Mfg. Survey was unchanged but remains very solid. Industrial Production saw a modest gain, both production and manufacturing components moderated from their October pace, but most signals are pointing to an accelerating factory sector contribution to the 4Q economy.

Producer Prices point to strengthening inflation, up 0.4% in the month, with rising energy prices leading the gain. Core PPI also rose – the pickup Y/Y will be a welcome indication to the Fed that inflation is gradually moving upward. The Consumer Price Index rose 0.4% M/M, lifting the Y/Y rate to 2.2%. Headline inflation was lifted higher by energy prices; core inflation was noticeably softer at 0.1% M/M and 1.7% Y/Y, held down by weakness in more volatile components.

Consumers appear to be entering the holiday season in good spirits. Retail Sales rose 0.8% M/M in November. The strength in retail sales gives credence to the strong increase we have seen for consumer confidence in the past year. Core readings underscore the strength, both ex-auto & gas, and control group sales also rose 0.8%. The first indication of the December labor market was very favorable, Jobless Claims fell 11K in the week, easily beating consensus expectations.

Of Note

  • AOL officially retired its instant messaging service AIM. The service, launched in 1997, was the forerunner to today’s ubiquitous text messaging applications.
Market Indices Week of 12/15

S&P 500                       0.9%

Russell 2000               0.6%

MSCI EAFE                   0.1%

MSCI EM                       0.7%

Commodities               0.1%

Barclay’s Agg.              0.3%

US Dollar Index           0.0%

10-Yr Yield                   2.36%

Oil ($/bl)                          $57

Gold ($/oz)                  $1,255

The Week Ahead

  • Housing Market Index
  • Housing Starts
  • New Home Sales
  • Personal Income & Outlays
  • Consumer Sentiment
  • Philly Fed Business Outlook
  • GDP
  • Jobless Claims
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