A tight job market increases the likelihood that inflation will begin to climb faster than 2% yearly, providing justification for the Federal Reserve to keep hiking interest rates. We anticipate a rate increase in mid-June and at least one more by the end of the year.
June 2018
US Economy: Job market strong, inflation tame.
Non-farm payrolls in the United States increased by 223,000 in May, lowering the unemployment rate to 3.8 percent, a historically low level (only in 2000 and 1969). Core inflation remained barely below the Fed's long-term target of 2%.
US Stocks: Growth over value.
Growth beat value in May, owing primarily to the performance of technology companies (+8.2 percent). Small-cap equities have also risen as a result of tax cuts, which are increasing profitability at smaller enterprises more than at larger firms, and decreased exposure to international markets.
Foreign Stocks: A tough May.
International equities markets were pulled down by uncertainty over Italy's new populist government, a weaker euro, and the danger of a trade war with the United States.
Fixed Income: Yields swoon.
US 10-year Treasury yields fell to 2.8 percent before recovering on concerns that Italy would leave the Eurozone and that the Fed would be too aggressive in raising US interest rates.
Non-Traditional: Oil at 2014 levels.
The price of oil rose to more than $77/barrel on a continued slowdown in production and possibly new sanctions against Venezuela.
The Takeaway
Wage growth (+2.7%) and retail sales (+4.7%) in the United States in May signal that economic growth in the second quarter will surprise to the upside. A tight job market increases the likelihood that inflation will begin to climb faster than 2% yearly, providing justification for the Federal Reserve to keep hiking interest rates. We anticipate a rate increase in mid-June and at least one more by the end of the year.
Non-US equity markets have recently slumped as investors weigh the impact of trade tensions and a less united European Union. We feel that the current dip is only transitory. Even if heightened volatility persists, prices and growth prospects in many international economies are appealing in comparison to the US, supporting strategic abroad investments.
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