Capital Market Implications for the Week of June 12 - 16, 2017
In addition to an interest rate hike by the Federal Open Market Committee last week, there were a number of economic releases. Several of the week’s reports were softer than expected, including the Consumer Price Index, May retail sales and both housing starts and housing permits for May. Given the strength of the labor market and the multi-decade low in the unemployment rate, it is hard to explain the decline in inflationary measures over the last three months. Nonetheless, for May, core CPI was forecast to hold at 1.9 percent year-over-year but instead fell to 1.7 percent. The housing market was also weaker than expected last month, as housing starts and permits both turned down. On another hand, as expected, the Federal Reserve increased short-term interest rates last week by a quarter of a percentage point to one percent. In their statement released last week, the Fed indicated they expected the current softness in inflationary pressures to be temporary and that inflation would pick up again in the second half of the year.
As capital market participants had expected last week’s increase in interest rates, markets performed well. For the week, the S&P 500 Index gained 0.1 percent while the Dow Jones Industrial Average rose 0.6 percent. The week’s best-performing equity sectors were industrials and utilities, which rose 1.7 and 1.6 percent, respectively. The week’s lagging sector was once again technology, which fell -1.1 percent. Last week, international stocks, as represented by the MSCI EAFE Index, ended flat while emerging markets lost -1.4 percent. Given the hike in short-term interest rates had been well telegraphed, longer-dated interest rates actually declined last week. Thus, for the overall week, the Barclays U.S. Aggregate Bond Index increased 0.2 percent, U.S. corporate bonds climbed 0.5 percent, high yield bonds rose 0.1 percent, and ten-year municipal bonds ended the week relatively unchanged.
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