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June
16
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Week In Review

Fed Raises Rates

As expected, The Federal Reserve Open Market Committee (FOMC) announced an increase in the target range for the federal funds rate to 1% to 1.25%.  According to the Fed statement, the labor market continued to strengthen and economic activity rose at a moderate pace.  The committee noted that business investment continues to expand and inflation is running somewhat below the committee’s 2% longer-run objective.

Our Take

The Fed says that it remains data dependent.  Yet despite recent data showing sluggish consumer activity, modest labor market gains, and little inflationary pressure, the Fed decided to move forward with the highly anticipated rate increase.  It remains to be seen if the “moderate pace” of the economy will generate the data needed to support another rate hike before year-end.  For now, the next step in removing accommodation appears to be balance sheet normalization, which the committee expects to implement before the end of the year.


Inflation

Producer prices were unchanged in May, while consumer prices fell 0.1%.  Core prices in May (excluding food and energy) were higher, as core CPI increased 0.1%, while core PPI rose 0.3%.  Year-over-year, consumer prices are up 1.9% and producer prices have risen 2.1%.

Our Take

Inflation has been moderating in 2017.  Inflation expectations, as measured by 10-year TIPS prices, have dropped from over 2% in January to closer to 1.7%.  The Fed continues to believe that lower inflation is due to transitory factors and seems bent on continuing to tighten.  Given the current backdrop, inflation is likely to remain restrained.


Retail Sales

May retail sales fell 0.3%.  This result fell short of the expected 0.3% increase.  Excluding autos and gasoline, May sales were flat.

Our Take

The expected economic bounce in Q2 is not showing up in retail sales.  Sales are relatively soft for the year, especially in autos.  Consumers remain hesitant, and will possibly remain so after the Fed rate hike increases borrowing costs.


Europe

Greece and the EU reached an agreement to release an 8.5 billion euro tranche of bailout loans, which will enable Greece to repay the principal on a bond issue maturing next month.  The deal included maturity extensions and caps on debt service cost as a percentage of Greek GDP.  The IMF did not find that the deal makes Greek debt sustainable and did not contribute to the bailout funds.  Greek bonds rallied on the news.

Our Take

The EU is continuing its game of “extend and pretend” with respect to Greek debt.  The IMF is holding firm in its position that creditors to Greece will need to take losses and that those losses should be realized now instead of pouring in more money to defer them.  This development serves as a reminder that the Greek debt crisis was never really resolved, and the broader peripheral debt crisis is still lurking.


Municipals

Illinois Governor Bruce Rauner announced on Thursday that he will call a special legislative session.  Lawmakers will return to Springfield for a 10-day session to work on the budget before the July 1 deadline.  The special session will begin on June 21 and run through June 30.

Our Take

Illinois lawmakers have been unable to pass a budget for the last two years.  By calling a special session, Rauner compels the lawmakers to return to Springfield and work on passing a budget before the new fiscal year, which starts on July 1.  Prior to the special session being called, some lawmakers had indicated that they would return to the Capitol to work on the budget, but no set date for a return was in place.  Failure to complete a budget could be expensive for the state, as S&P Global Ratings has indicated that without one in place before the deadline, Illinois could face another downgrade.