The Federal Reserve was back front and center this week as their latest meeting concluded with much anticipation. A pause on interest rate hikes had been expected and the Fed delivered. “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,” the central bank’s post-meeting statement said. But it was certainly not all roses as Chairman Powell stated in his post meeting press conference that the broader committee expects to see two more increases before year-end. This caught the attention of our financial markets as a brief sell-off ensued. With the next meeting set for July 25-26, there is still plenty of time to allow more economic data to come out before another decision is made. Despite the clear “hawkish pause” by the Fed, the rally in our markets resumed on Thursday to carry us to another winning week. What is of interest to me is that many economists believe the Fed WILL NOT raise rates significantly further as evidenced by the continued strength of our markets. The probability of another rate hike in July sits at 67% according to the futures market, while hikes in September sit at 9.4%, 8.7% for November, 5.1% for December. As we have said many times before, the more time that passes the closer we get to more clarity. As frustrating as it can be it is our reality for now!
One of the key economic metrics to watch is the CPI (Consumer Price Index). The consumer price index rose at a 4% annual pace in May, the lowest reading in over two years, the U.S. Bureau of Labor Statistics said in its latest inflation report. While moving in the right direction, prices are yet to move lower at a pace the Fed is happy with (hence the need to keep raising interest rates). For those who love the data behind all of this, the U.S. Bureau of Labor Statistics produces some fascinating and interactive charts. If you follow the link below, you can see how the prices of specific items like bread, chicken, eggs, electricity, and gasoline have changed over the years.
Overall, May’s reading was the lowest annual figure since March 2021 and a significant decline form the 9.1% pandemic-era peak in June of 2022. What a difference a year can make but we still have a way to go. Keep in mind that the Federal Reserve continues to reiterate a target inflation rate of 2%.
Around the world we’re seeing conflicting moves from the world’s central banks. In the past few days, we saw the US hold rates, Eurozone raise rates, and Chinese cut rates. The world’s economies are all at vastly different stages of the economic cycle. Currently the Eurozone is in a technical recession but continues to face high inflation. While China has no inflation problem, they are suffering from the aftereffects of lockdowns and real estate bubble. We’ve already seen this divergence swing into currencies as well. China’s yuan has weakened so far this year while the euro and sterling have been driven up against the dollar. Such moves are exactly what’s meant to happen. The fundamental purpose of a flexible currency is to grant central banks the freedom to determine interest rates based on the specific challenges faced by their respective economies.
Due to the interconnectedness of capital markets, numerous countries, companies, and significant global investors base their decisions on the dollar. Consequently, when the dollar weakens, it generates a sense of optimism among all parties involved. This sentiment is reflected in the performance of European stocks in local currencies and emerging markets (excluding China), both of which have seen nearly identical increases as the S&P 500, coinciding with the weakening of the dollar. “Even as economies and central banks diverge, most capital markets remain tightly integrated and linked to a common global force: the dollar.”
A lot of technical jargon in the letter this week but sometimes it is needed! As we move into summer, we know the headlines will rarely give us a break, but for now we will welcome the strength in our markets and relish the warmer days. Enjoy and be safe!
Christopher E. Wasson, CFP®
Mosaic Asset Partners, LLC
1122 Kenilworth Drive, Suite 310
Towson, MD 21204
410.821.0089 fax 410.821.5993
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Mosaic Asset Partners, LLC is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.