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Reading Between the Words

If you like to read between the lines, this was a good week for you. Words said were changed, some were said unexpectedly and other words were ignored to make room for what people wanted to hear. To start with, Federal Reserve Chairman Jerome Powell's two-day testimony to Congress became more about trade, bank stress tests and the Fed's regulatory duties than about the Federal Reserve's mandates of employment and inflation. Powell did his best to give an upbeat assessment of the economy amid questioning about topics outside of the Fed's responsibilities. When repeatedly asked about his stance on recent trade tariffs, Powell offered this opinion: In general, countries that have remained open to trade, that haven't erected barriers including tariffs, have grown faster. To this end, Powell asserted that while the recent tax cut is continuing to boost spending and investment, it is too early to know the real impact of the trade tariffs on economic growth.

On a topic closer to our hearts, Powell maintained the committee's belief that for now…the best way forward is to keep gradually raising the benchmark rate, avoiding the issue of how many rate increases remain. The Chairman made it clear the FOMC will continue to monitor data for any price pressures related to tariff issues and act accordingly if changes to the policy are necessary. The committee has been willing to let inflation run slightly above its target of two percent.

While on the subject of the Fed and interest rates, President Donald Trump said in an interview on CNBC that he is not thrilled with interest rates moving higher, but will let the Fed do what it does best. Trump feels the Fed’s current policy could put the U.S. at a disadvantage, while the European Central Bank and Bank of Japan continue on a path of easier monetary policy. The White House put out a statement after the interview confirming that Trump respects the independence of the Fed and has confidence in Federal Reserve Chairman Jerome Powell.

Key Indicators this Week:

Retail Sales – Sales increased 0.5 percent in June and were revised higher for May. This was the fifth month in a row for improving sales. Eight of the 13 major categories posted gains. Auto sales jumped 0.9 percent, and non-store retailers, i.e., online shopping, rose 1.3 percent, the most since November. Apparel sales fell 2.5 percent, which is probably just a correction of the previous reading of a 2.9 percent increase. All in all, the report bodes well for second quarter GDP. The first estimate for GDP, due 7/27, is expected to show 4.0 percent growth.

Housing Starts – Construction on new homes plummeted 12.3 percent in June. Both multi- and single-family activity fell double digits. Prospective buyers are contending with rising interest rates and home prices, while builders are dealing with higher lumber and land costs. All four regions of the country posted negative numbers.

Strategically for Credit Unions:

The bond market is already in the dog days of August. Yields moved two to three basis points along the maturity spectrum. The two-year Treasury note reached the highest yield since 2008. The yield curve ranged between 24 and 26 basis points. With nothing new to shake the market, the short end continues to move higher on the 88 percent chance of a September rate move, while the long end contends with trade and geopolitical issues.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.