- Powell testifies before Congress. Federal Reserve (Fed) chair Jerome Powell emphasized a “solid pace” of U.S. economic growth in a testimony before Congress on Tuesday, a signal that the Fed plans on continuing its path of gradual rate hikes. Powell qualified that gradual tightening will continue “for now”, possibly trying to reassure markets that the Fed’s decisions remain data-dependent. However, fed funds futures read Powell’s testimony as hawkish, and are now pricing in a 60% probability of a fourth rate hike this year. As of now, we still see one additional hike this year (three total) as the more likely scenario, but we will continue monitoring Fed activity and any changes in the economic backdrop.
- Industrial production rebounds. Industrial production in June rose 0.6%, reversing a 0.5% decline in May. Manufacturing output climbed 0.8%, the most in four months (after a -1.0% drop in May), and capacity utilization continued to rise. The rebound in industrial production is a signal of economic growth, and could help lift the second-quarter gross domestic product (GDP) print (scheduled to be released next week). Currently, the Bloomberg consensus for the second-quarter GDP is 4.0%.
- Yield curve inversion. The yield curve continued to flatten as the 3-month Treasury yield closed above 2% for the first time since June 2008, further stoking investors’ anxiety over a possible yield curve inversion. The spread between the 3-month and 10-year Treasury, one of the gauges we monitor in our “Five Forecasters” for an economic recession, narrowed to 85 basis points (0.85%) yesterday. We predict that an economic recession is likely if this spread falls to -0.5%, a scenario that we still view as unlikely. For this to happen, the 3-month yield would have to rise 1.35% (implying six 25-bp rate hikes) while the 10-year yield remains unchanged.
- Strong second quarter tees up second half. With stocks posting gains each month during the second quarter, history suggests it may not be a good time to sell stocks. We explain why on the LPL Research blog at noon eastern.
- Japan: All Industry Activity Index (May)
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