Glass half-full for markets: Fed close to an end, inflation easing, growth resilient

DEWITT, Mich. - Aug. 2, 2023 - PRLog -- Key Takeaways:

• While the move higher in markets was sparked earlier by the enthusiasm around AI (artificial intelligence), more recently the markets seem to be looking at a trifecta of better macro trends: The Fed and other global central banks may be nearing an end to rate-hikes, inflation continues to gradually moderate, and growth remains resilient.
• Keep in mind that after a nice move higher in markets, some bouts of volatility remain likely. However, we believe there are compelling opportunities still ahead of us, in both the equity and bond markets.

Was this the last rate hike from the Federal Reserve? They may not admit it, but it very well could be. Rate cuts are still unlikely this year.

As expected, the Fed raised interest rates by 0.25% at its July FOMC meeting, bringing the fed funds rate to 5.25% to 5.5%. Notably, Fed Chair Jerome Powell was careful not to declare "mission accomplished." He emphasized that no decision had been made on future rate hikes or on the September meeting.

The Fed and markets will digest two additional CPI inflation readings and two U.S. jobs reports between now and the Sept. 20 meeting. This will help determine the path of interest rates going forward.

Powell did acknowledge, however, that inflation is now well off its peak. Headline CPI inflation has come down year over year from 9.1% in June 2022 to 3.0% in this past June¹.

U.S. GDP data this week had something for everyone: Growth remains resilient, and inflation continues to moderate.

The first look at second-quarter U.S. GDP growth last week surprised to the upside, indicating an economy that remains at above-trend speed. The annualized growth figure came in at 2.4%, well above estimates of 1.8%, and accelerated from last quarter's 2% growth rate¹. This resilient growth rate was supported by strength in business investment and a rebuild of inventories across companies. Of note, personal consumption, which is a primary economic driver, came in at 1.6%¹. This was above expectations of 1.2% but cooling versus last quarter's 4.2% annualized growth rate¹.

Overall, markets seem to be embracing a goldilocks-type scenario.

While the move higher in markets this year was sparked by the enthusiasm around AI (artificial intelligence), more recently, the markets seem to be looking at a trifecta of better macro trends:

• The Fed and other global central banks may be nearing an end to rate hikes.
• Inflation continues to moderate.
• Growth remains resilient.

This has been reflected in markets through a broadening of leadership. Economically sensitive parts of the market, including small-cap stocks and cyclical sectors, have outperformed in recent weeks.

Source 1: FactSet