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Inflation to Remain Low…For Now.

In my view the Fed did little to alter views on the timing for higher interest rates.  The Committee stated their intentions to raise rates this year and that their decision will be data dependent.

The FOMC stated “economic growth slowed during the winter months, in part reflecting transitory factors…the pace of job gains moderated…and the underutilization of labor resources was little changed.”

The Committee commented “inflation is anticipated to remain near its recent low level in the near term but expects to rise to 2% over the medium term.”

In other words, its post meeting statement reflected yesterday’s release of first quarter GDP which indicated growth slowed to a crawl because of weather, surging dollar, slump in business investment and the west coast port strike.  Inventories surged.  If it were not for the increase in inventories GDP would have been negative.

The GDP data indicated consumer spending rose by 1.9% versus the expected increase of 1.7%. I think one item of significance, disposable income adjusted for inflation climbed at 6.2% in the first quarter, the most in two years, the result of the smallest gain in the inflation indices ex food and energy since the end of 2010.

Equites had little response to the Fed meeting as benchmarks were down about 0.50% before the meeting ended and closed around pre meeting levels.  Energies and financials were strong offsetting considerable weakness in market leaders.  Treasuries were hit hard on the belief that all sovereign debt markets are vastly overvalued, especially the European markets where negative yields are prevalent.

Last night the foreign markets were mixed.  London was flat, Paris down 0.16% and Frankfurt up 0.22%.  Japan was down 2.69% and Hang Sang down 0.94%.

The Dow should open nominally lower as the markets continue the weigh the prospects of a rate increase sometime this year.  Moreover the “reinflation trade” narrative is beginning to build some momentum.  And then there is Greece.  The 10-year is off 2/32 to yield 2.05%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.