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1-2-3...About Face

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The last week of the month made up for the dullness of the previous three weeks. The financial markets did an about face after global central banks began addressing tighter, rather than easier, monetary policy. After touching the second lowest yield of the year, the 10-year Treasury note skyrocketed 14 basis points in a matter of days. Stocks posted mostly losses this week, with the Dow tumbling triple digits on more than one day. Three of the five largest central banks followed what the Federal Reserve alluded to earlier in the month – it may be time to remove stimulus programs and normalize interest rates. In other words, maybe, just maybe, the leading economies in the world are thinking alike and positioning themselves for higher interest rates. When and if the other central banks follow the U.S. and raise rates remains to be seen. But, it feels like we are turning a significant corner, and the financial markets are struggling to catch up.

Other Key Indicators this Week:

Housing – The number of signed contracts to purchase a home fell for the third month in a row. Pending home sales declined 0.8 percent in May and were revised lower for April. Industry analysts read this third consecutive drop as a sign the market may have topped out. Homebuilders are now citing "critically low supply" as a deterrent in activity. The lack of inventory is pushing prices higher, making it even more difficult for first-time homebuyers to enter the market. Most of the buying activity has been in homes priced above $750,000 and from investors or repeat buyers with larger down payments. In a separate report, home prices rose 5.5 percent from a year ago. The 20-city Composite increased 5.7 percent, with all the cities posting gains. Seattle led the way with a gain of 12.9 percent, followed by Portland (OR), up 9.3 percent.

GDP – The economy grew stronger in the first quarter with each passing month, or at least with each passing recalculation. First quarter GDP was revised to 1.4 percent from the previous estimate of 1.2 percent. Consumer spending and stronger exports were the biggest factors for the improvement. Overall spending increased 1.1 percent and was centered around financial services, health care and insurance. Exports of industrial supplies and materials contributed to a seven percent gain in export activity. Analysts expect second quarter GDP to be between 2.5 and three percent.

Spending – Consumers remained cautious about spending in May, despite a 0.4 percent gain in incomes. Spending increased only 0.1 percent after a 0.4 percent gain the previous month. The bulk of the increase in incomes came from a 4.8 percent jump in dividends. It appears most of the dividend payment went to savings, which returned to the highest level since September, 5.5 percent. The year-over-year PCE gauge, a key measure of inflation, declined to 1.4 percent, the lowest level since December 2015. The index has been declining each month this year.

Strategically for Credit Unions:

The yield curve gained 10 basis points this week, but remains flat at 90 basis points. Finding value in the investment market continues to be a challenge due to tight spreads and dwindling inventory. The last fed funds rate increase gave a significant yield boost to Catalyst Corporate members' cash accounts. The extended low-rate environment we have been in for years made it easy to ignore the value of cash accounts. With short rates moving higher, now is a good time to re-evaluate where your excess funds are held.

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.