Grey and Gloomy or Merry and Bright?

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What has changed in the markets over the last week? Essentially nothing. The Commerce Department affirmed real U.S. GDP at 3.5% for the third quarter. Consumer spending surged 0.6% in October, the biggest increase in seven months. Inflation slipped a little, with core PCE coming in at 1.8%. Housing data continue to disappoint, with new home sales sinking to an annual rate of 544,000 — the lowest level since March 2016 but in no danger of crashing. Overall, the U.S. economy is humming, and we believe it is on target for 3% growth in 2018.

Despite such supportive underlying conditions, markets pulled back dramatically, fretting about the sustainability of earnings and trade tensions with China. Expectations for any kind of progress with China during the G20 meeting are very low, so any encouraging signs elsewhere potentially can lift this market.

We saw such a lift this week, when the market turned on a dime, soothed primarily by the perceived dovish comments of Federal Reserve Chairman Jerome Powell. Powell said rates are “…just below the broad range of estimates of the level that would be neutral for the economy...” His words led investors to believe it may not take as many interest-rate hikes as previously thought to get to neutral, which may leave Fed officials open to a pause.

It did not seem to matter that no one really knows exactly what the neutral rate is, or that the Fed said absolutely nothing about a change in its hiking plans. All that mattered was that Powell sounded slightly more dovish than he did previously, and kaboom, the markets took off. Grab another glass of eggnog and stay tuned.

Please watch inflation and the PCE (the Fed’s preferred measure of inflation) on page 60 of the Global Perspectives Book.

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