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WEEKLY ROUND-Up Thru Jul 28th 2023; “Rock ‘n Roll”

Current markets are showing now signs of a nearby recession as corporate earnings continue to beat expectations. This does not mean we are in the “all clear” for coming recession; -rather the probabilities have dropped somewhat. Get my take on where the current markets are and what we can expect over the coming months.

Weekly Sound Bites:

US indexes ended higher over a week notable for the Dow Jones Industrial Average’s notching its 13th consecutive daily gain on Wednesday, which marked its longest winning streak since 1987.

On Wednesday, the Commerce Department reported that the economy had expanded at a year-over-year pace of 2.4% in the quarter, well above both the previous quarter’s growth rate of 2.0% and consensus expectations of around 1.8%. Both businesses and consumers appeared to remain in good shape and spending freely. Durable goods orders jumped 4.7% in June, while personal spending rose 0.5%. Pending home sales also rose unexpectedly. Then on Friday we saw that sentiment got a boost a series of generally positive economic readings, particularly on inflation. Stocks opened sharply higher on Friday, following news that the Fed’s preferred inflation gauge, the core (less food and energy) personal consumption expenditures (PCE) price index had risen with a year-over-year increase of 4.1%, a tick lower than expectations and the slowest increase since September 2021. In addition, the employment cost index—closely watched because of policymakers’ continued concern about wage inflation—rose 1.0% in the second quarter, also below consensus and the smallest increase in two years.

The Fed announced a 25-bps rate increase in the federal funds target rate following the conclusion of its two-day policy meeting on Wednesday, as expected. Expectations grew that the Fed was done raising rates, at least for the year. In his post-meeting press conference, Fed Chair Jerome Power Ranger Boom Boom” Powell acknowledged that “restrictive” monetary policy was now “putting downward pressure on economic growth and inflation and they will monitor key economic data for signs of more slowing in inflationary pressures. The futures markets ended this week pricing in only a 27.4% chance of further rate hikes by the end of the year compared with a 90.8% chance the week before.

In Europe, the ECB increased interest rates to a record-equaling high of 3.75% in a largely expected move. The bank cited the prospect of euro area inflation staying too high for too long as a key reason for the 0.25-percentage-point hike. Annual inflation in the euro area came in at 5.5% in June, down from 6.1% in May but still well above the ECB’s 2% target. Despite the Federal Reserve and the European Central Bank (ECB) announcing interest rate increases, investor sentiment appeared to receive a lift from the dovish tone struck by policymakers.

Following its July 28–29 monetary policy meeting, the BoJ decided to keep its key short-term interest rate unchanged at -0.1% and that of 10-year JGB yields around zero percent. However, the central bank surprised investors with the announcement that it would conduct YCC with greater flexibility to enhance the sustainability of monetary easing under the current framework. the BoJ left its projected real economic growth rates unchanged, anticipating that gross domestic product will expand 1.3% year on year (y/y) in fiscal 2023. The central bank revised its forecast for the consumer price index (CPI) in fiscal 2023 to 2.5% y/y from 1.8%.

Chinese equities rallied after Beijing signaled it will provide more stimulus to support the economy. Economists lowered their growth forecasts for China as it continues to grapple with weak demand. China’s gross domestic product is projected to expand 5.2% this year, down from previous estimates of 5.5%, while growth for 2024 is forecast to expand 4.8%

Enjoy this Week’s Round Up

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