Weekly Market Highlights

Federal Reserve and ECB monetary policy continues to decouple

  • The S&P 500, MSCI EAFE and MSCI Emerging Markets indices posted gains of 1.8%, 0.8% and 0.8%, respectively, last week
  • The FOMC minutes were slightly more hawkish than anticipated

Last Week’s Highlights

  • U.S. Consumer Price Index:  +0.1% in July month-over-month and +2.0% year-over-year (core CPI increased 0.1% month-over-month and 1.9% year-over-year).
  • U.S. Housing Starts:  +15.7% to SAAR of 1.09 million units in July.
  • U.S. Building Permits:  +8.1% to SAAR of 1.05 million units in July.
  • U.S. Existing Home Sales:  +2.4% to SAAR of 5.15 million units in July.
  • Oil:  $93.65 ($3.70)
  • Gold:  $1,280.20 ($26.00)
  • U.S. 10-year Treasury:  2.40% (0.06%)
  • Dollar:  Euro--$1.32, Yen--103.96 (strengthened against Euro and Yen)
  • VIX:  11.47 (1.68)

What to Watch for

  • Monday 8/25:  U.S. New Home Sales
  • Tuesday 8/26:  U.S. Durable Goods Orders
  • Tuesday 8/26:  Case-Shiller Home Prices
  • Tuesday 8/26:  U.S. Consumer Confidence
  • Thursday 8/28:  U.S. 2Q 2014 GDP (second estimate)
  • Friday 8/29:  U.S. Personal Income and Outlays

Global monetary policymakers descended on Jackson Hole, Wyoming last week as the S&P 500 continued an upward ascent to new all-time highs. The two most closely watched speeches at the economic symposium were delivered by Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi. Neither surprised the investment community with their remarks, but their comments did illustrate the decoupling of monetary policy that is taking hold between the United States and Europe. While Yellen’s speech focused on continued labor slack, the Federal Open Market Committee (“FOMC”) is moving closer to its first rate hike. Meanwhile, Europe is still plagued by low inflation and uneven growth and the possibility of Draghi pursuing some form of quantitative easing has increased.

Fed Timing

Although it has become quite clear that the Fed will begin tightening policy in 2015, the timing has been a bit of moving target. Yellen has said rate hikes will be data dependent and the ebb-and-flow of economic releases, particularly for inflation and the labor market, makes that a complicated assessment. Currently, June 2015 is our base case scenario for the first federal funds rate hike. That being said, the latest FOMC minutes that were released last week were slightly more hawkish than expected and earlier rate hikes remain a possibility if the U.S. economy accelerates in the remainder of the year. Earlier rate hikes could contribute to some volatility across financial markets but we believe the strong economic backdrop that would accompany such a decision would be beneficial for equity markets in the long-term.

All European Roads Lead to QE?

European policymakers are also debating a decision, but Draghi’s is related to the pursuit of quantitative easing. The ECB has often used communication and promises to keep policy loose in his attempt to weaken the euro and spur growth and inflation in Europe. In June, the ECB announced a package of easing measures, which have yet to move the inflation needle in a meaningful way. Draghi would like more time to assess the ECB’s interest rate cuts and targeting lending programs and would ultimately like to avoid the use of quantitative easing if possible. With inflation running at +0.4% year-over-year (latest reading will be out Friday), time is running out before Draghi is called upon to make a bigger splash. Although economic fundamentals remain challenged in Europe, the good news for markets is Draghi and his colleagues remain committed to supporting the recovery and stand ready to act as needed.

Data Source: FactSet and RIMES

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