August 2017 Market Review

Although the economic data were mixed, the theme for the month was ultimately stable growth but weak inflation. Retail sales, consumer confidence, and GDP all were positive; housing releases disappointed. Corporate earnings topped 10% for the second consecutive quarter. Most importantly, inflation has clearly remained below market expectations as well as the Federal Reserve’s 2% target.

The markets had to digest a wide range of news and events: threats from Korea, dovish Fed minutes, the action (or lack thereof) at Jackson Hole, NAFTA renegotiations, a terrible tropical storm in Houston, and another month of political controversy, along with a solar eclipse.

A core PCE deflator reading of 1.4% complicates the Federal Reserve’s policy planning. Although the Fed Governors would like to move to a normalization of monetary policy, they risk choking the recovery. As the month closes, the market is estimating a 35% chance of a rate hike by year end. The market will keep a sharp focus on inflation data.

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