Second Quarter Strategy Review
Last quarter we talked about how soft sentiment data such as the survey of expected business conditions could be a leading indicator of a stronger US economy ahead. However, with US GDP coming in at 1.4% for the first quarter down from 2.1% in the fourth quarter as well as weaker industrial production and retail sales in May, the hard data is mixed at best. Nevertheless, this did not stop the US Federal Reserve (Fed) from increasing the federal funds interest rate again in June for the second time in 2017 citing the continued strengthening of the US labour market and expansion of economic activity including household spending and business fixed investment. It also appears there could be one more rate hike between now and year-end based on the Feds projections from its June meeting. The Fed also announced it will begin unwinding its $4.5 trillion in securities holdings by decreasing the reinvestment of the principal payments it receives from securities held on its balance sheet. Effectively, the Fed will cap (in graduated increments) the amount it will reinvest from maturing securities going forward, which equates to another form of monetary tightening, the exact impact of which is uncertain.