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Weekly Market Update – July 7, 2017

The Dow finished Friday rising 94 points to close at 21,414. For the week, the Dow was up 0.3% (S&P 500 +0.1%) and year-to-date is now up 8.4% (S&P 500 +8.3%). It was a quiet holiday week ahead of second-quarter earnings season, though strong payroll and domestic manufacturing data helped bolster equities faced with valuation concerns. The yield on the 10-year Treasury rose 2 basis points on Friday to 2.38%, up 9 bps for the week.

We view the start of Q3 as favorable for fixed income.  The yield on the 10yr.Treasury has fallen from January through June, Q1 GDP is barely above 1% annualized, the schedule for major tax reform is pushed out as is that for an infrastructure initiative, and wage growth and inflation are contained. 

US economic data this week were generally positive.  June employment data, released Friday, showed an impressive 222,000 increase in nonfarm payrolls, 25% better than analysts’ consensus estimate. Gains in the previous two months were also revised upwards by 47,000.  However, the topline outperformance did not translate to wage growth: average hourly earnings rose 0.2%, less than the 0.3% forecast (annualized growth of 2.5% also missed 2.6% estimates). The labor force participation rate ticked up to 62.8%; unemployment rose by the same to 4.4%. In other news, the ISM manufacturing index ticked up to 57.8 in June, 5% better than analysts’ estimates, marking its highest level since August of 2014.  The details of the report showed strong demand, an improving employment picture, and an uptick in new orders.  Fifteen of the eighteen industries included in the index expanded in June, while only three – apparel, textiles, and metals – contracted.  Light vehicle sales declined for a sixth straight month in June, albeit not as badly as feared.  Auto stocks were up on the news.

The minutes of the Federal Reserve’s Open Market Committee, released this week, showed the Fed staying the course on rate hikes and balance-sheet normalization. Depending on the data, we expect one more 25bp raise in Fed Funds this December.  Although the Fed plans to reduce its balance sheet, which will reduce their purchases of government securities, we believe the Fed when it insists this will be done gradually. The start of this effort could be Q4 of this year.  The Fed’s action may be offset by security purchases from others engaged in a “flight to safety” strategy as the conflict between North Korea and the rest of the world heats up. For the rest of the year, we expect interest rates to slowly grind higher. 

The price of crude oil fell 3.6% this week to $44 a barrel – down 17% YTD. An eight-day rally ended abruptly mid-week, followed by a steep 6% drop in prices.  Crude stockpiles showed a much better-than-expected draw of 6.3m barrels (estimates had the draw at 2.1m).  However, domestic production rose sharply. Investors are growing increasingly skeptical about the effectiveness of a deal between OPEC and other major exporters to reduce production. 

Next week’s economic calendar will include the NFIB Small Business Optimism Index on 7/11, June inflation on 7/14, retail sales on 7/14, capacity utilization on 7/14, and consumer sentiment, also on 7/14.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.


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