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Discussion + Disagreement=Confusion

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Minutes from the June FOMC meeting indicate a Federal Reserve that seems confused about a number of things. At the top of the list is inflation, followed by when to begin reducing the balance sheet and how to do so without disrupting the financial markets. Discussions at the two-day meeting focused on why inflation remains stubbornly low despite the tight labor market and improving economic conditions. Some members suggested there is growing risk tolerance in the financial markets, i.e., rising stock prices; others believe the low price of commodities is temporarily keeping price pressures muted. Regardless of the reason, there was general support for continued gradual interest rate hikes. As for the timing of the balance sheet reduction program, a few members were in favor of announcing the start in a couple of months, while others thought it was better to wait longer. The conflict centered on not wanting to disrupt the financial markets or give the impression the Fed was acting too aggressively. The consensus from market analysts suggested the Fed might begin its reduction program in September and wait until December to implement another rate increase.

Other Key Indicators this Week:

Jobs – June was a good month for jobs. A net total of 222,000 jobs were added during the month, bringing the three–month average to 194,000. All industries posted solid gains except motor vehicle companies and information technology, which had a combined loss of 5,000 jobs. The unemployment rate inched higher to 4.4 percent as both the number of employed and unemployed people in the household survey increased. Some of the underlying details were not as favorable, which kept the financial markets’ reaction muted. Wages rose 0.2 percent, less than expected, and remains a troubling detail in what many consider to be a tight labor market. The U6 rate, a measure of the underemployed, rose two tenths of a percent to 8.6 percent.

ISM Index – Both the manufacturing and non-manufacturing ISM gauges point to a strong rebound in second quarter GDP. The manufacturing composite rose almost three points to 57.8 in May, the highest reading since August 2014. The growth in production, employment and new orders suggests activity on the factory floors continues to be strong.  The non-manufacturing index was up almost two points, to 57.4, marking the 90th consecutive month of increases. Sixteen of the 17 industries reported growth in June. Respondents to the surveys feel optimistic about the second half of the year due to strong global demand and continued service-sector business.

Auto Sales – Auto sales continued to decline in June, falling to the lowest sales volume since February 2015. The sharp decline surprised industry analysts who had been hoping for at least somewhat stable sales. June’s sales rate of 16.4 million units, on a seasonally adjusted annual basis, marked the sixth year-over-year decline. WardsAuto estimates that inventory levels at the end of May were 600,000 units above the optimum level for current demand. While June sales alleviated some of the overhang, inventory levels remain uncomfortably high. Auto assembly plants have already decreased staff by two percent this year and fear more cuts will be necessary. The plant scale backs have been uneven, with car plants suffering more as people turn to purchases of larger automobiles. Sales of SUVs and light trucks are up about four percent from a year ago.

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.