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Investing Specialists

The Fed Remains Solidly on the Fence

The central bank's July release seems to leave the door wide-open for a rate increase--or maybe not.

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It was a so-so week for most world equity markets, with most developed markets adding about 1% and emerging markets feeling fortunate to get back to the flat line after an ugly start to the week. That early slump was due to more bad news out of China, this time from the manufacturing sector. Markets generally improved over the course of the week, with the economic news on the softer side and a relatively bland statement from the U.S. Federal Reserve. Both slower economic activity and the Fed's ambivalence cast more doubt on the prospects for a September rate increase. The market cheered the potential delay, along with more stabilization in the Shanghai Stock Market and generally better-than-expected earnings news (although there were a few clunkers, too, such as  Whole Foods (WFM)). Commodities had yet another bad week, down about 2.5%, led by oil, with the WTI now trading at about $46 a barrel. That and slow growth in China continued to take their toll on other commodities. About the only piece of the puzzle that did not fit this week was higher interest rates on the 10-Year U.S. Treasury bond that went up from 2.22% to 2.27%. Rather than Fed worries or economic data, the rate was probably driven higher by fewer flight-to-safety buyers as the two problem children, Greece and China, seemed to stabilize.

U.S. economic news was relatively tame, with no big swings in either direction. While the GDP growth rate for the June quarter was a little light at 2.3% growth, a huge markup in the first-quarter report (from negative 0.2% to 0.6%) more than offset that concern. About our only worry with the report was the dominance of the consumer, who accounted for 90% of the overall GDP growth rate. Businesses remained largely on the sidelines with overall growth in business investment shrinking in the second quarter. Exactly how much of that was oil-related is hard to tell, but I would guess it wasn't insignificant.

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Robert Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.