This week’s Federal Open Market Committee Meeting and Announcement are not expected to provide much in the way of excitement for the street. The FOMC is widely expected to keep the federal finds target unchanged at 1.00 to 1.25 (leave rates unchanged). Additionally, any mention of the current state of inflation within the economy is likely to be nothing more than what has already been well telegraphed by Fed officials in recent talks. In fact, by all indications, inflation, as stated in the June FOMC statement, is slowing. In July we have seen no noticeable uptick in inflation thus far. As a result, investors are not expecting any move to tighten further in the near term. Other than a focus on rates and inflation outlook, investors will be keeping a close eye on any further clarification on reducing the size of the balance sheet.
Friday’s initial Q2 GDP reading
As you may remember, the final Q1 GDP reading was a rather disappointing 1.4% though it was revised significantly higher after the initial reading of 0.7%. According to Bloomberg Consensus estimates, the initial Q2 reading is expected to result in a significantly more robust 2.6%. The GDP Price Index and Real Consumer Spending verticals in the report are expected to provide mixed signals. In the case of the former, consensus is calling for a tick lower to 1.2% from Q1’s final reading of 1.9%. The Real Consumer Spending data however is expected to reflect an uptick from Q1’s anemic 1.1% to 2.8%. If the GDP Report is in line with expectations, markets will continue to trade off earning results. In that event and given the back drop for equities, generally speaking and outlined above, the drift higher in prices that we have been treated to in recent sessions remains the path of least resistance.
This week FANG stocks will dominate. On Monday, Alphabet (GOOGL) and Cadence Design Systems (CDNS) will report quarterly results. Later in the week we will also hear from Facebook (FB), Amazon and (AMZN). If last week’s report by Microsoft is any indication of what to expect in the large cap tech space, we may well see both a significant uptick in volume as well as price appreciation.
As legendary strategist Sam Stovall points out in his latest note, “even though market volatility may pick up in the traditionally soft August and September months, we continue to view equities as the asset class of choice.” Between rising Q2 EPS estimates, a strong start to earnings season, near target inflation, constructive economic data, and the prospect of a singular rate hike for the balance of 2017, it is hard to make an argument against his thesis.