As expected, the Federal Reserve kept interest rates unchanged last week at its September meeting. The overall outlook shared, however, was one of higher rates for longer, with perhaps one or two more hikes this year.
In the short-term, U.S. stock market indexes didn’t show much love in response to the hawkish-sounding Fed, as the S&P 500 fell by 2.93%, the Nasdaq 100 traded lower by 3.30%, and the Dow Jones Industrial Average decreased by 1.89% for the week.
Pause with a “Clause”
At the September meeting, the Federal Reserve delivered a more sobering message than many had hoped for. Essentially, the message was that the Fed would keep rates unchanged this time (i.e., a pause), but that it ultimately predicts higher rates for longer (i.e., the “clause”).
The Fed also indicated that rates will likely remain “high” further into next year than it had previously anticipated.
In the Fed’s Summary of Economic Projections (SEP), division among voting members was apparent, with 12 out of 19 Fed officials favoring one more rate hikes this year.
Treasury Yields Rise
Leading up to and continuing after the conclusion of the Fed meeting, Treasury yields rose.
The benchmark 10-year note, used as a barometer for mortgage rates and many other products, rose by around 11 basis points last week; it closed the week near 4.439% after notching its highest level since 2007.
Two-year yields and other short-term duration Treasuries also rose last week, with the two-year note yield hitting a 17-year high near 5.197% last week; it settled near 5.114% for the week.
Yields at present levels may present viable opportunities for certain investors. And it’s not just Treasuries – municipal bonds and high-quality corporate bonds are also becoming attractive.
Government Shutdown Looms
The next government funding deadline of Oct. 1 is looming and will surely be in the headlines all this week. Lawmakers have differing opinions on funding and spending cuts.
It seems that the uncertainty of a potential shutdown started to be priced into financial markets last week, and we will see what this week brings.
Volatility Returns
Let’s face it – we have had a pretty smooth ride in the markets for 2023 so far, especially given the rising interest rate environment.
S&P 500 Volatility, as measured by the $VIX index, has been subdued for an extensive period, matching 2020 lows, even at the start of last week. That means investors were not expecting market volatility and were perhaps overly complacent given the headline risks and current environment.
Last week, however, S&P 500 Volatility ($VIX) woke up and rose around 24.57%, as the S&P 500 experienced its worst week since March.
Rising rates, a looming government shutdown, and a higher-for-longer Fed narrative were likely all partial contributors to the rising volatility.
A Reminder on Time
Time – it is one of the golden keys to investing. Speaking of time, we are approaching the end of the quarter and the end of the month. Is 2023 flying by, or what?
September is notably a soft seasonal time of year for U.S. equities. With only a week to go, we will see where the rubber meets the road as the markets digest the Fed, a looming government shutdown, and a “higher for longer” narrative.
The news headlines are getting more bearish – can that be a good thing? These types of news periods can be boons for many long-term investors with certain risk tolerances and investment objectives.
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Overall, major U.S. stock indexes traded in mostly narrow trading ranges last week, digesting the inflation data while eagerly awaiting this week’s Fed rate decision and commentary.
Putting numbers to the week, the S&P 500 declined marginally by 0.16%, the Nasdaq 100 fell by 0.51%, and the Dow Jones Industrial Average rose very slightly by 0.12%.
Inflation Warming – The Latest
August Consumer Price Index (CPI) data showed inflation rising a tick more than expectations, with a 3.7% year-over-year increase versus the 3.6% expected. Breaking it down further:
Some analysts say that the higher inflation numbers for August are nothing to worry about. Others feel differently. Markets took the mixed yet higher inflation data in stride, mostly shrugging off the CPI data after its release.
Now, the market is holding its breath ahead of the Federal Reserve meeting this Wednesday.
Wednesday Is “FedDay”
Despite last week’s higher August inflation reading, probabilities have remained very high that the Fed will leave rates unchanged on Wednesday, according to the CME FedWatch Tool.
Any change in rates on Wednesday would be a shock to the market at this point. But it’s not the rate decision that many are looking at – it’s the Fed’s guidance and statement after the decision is released.
What is the Fed thinking about the November meeting? How do the recent inflation metrics affect their policy mindset? Will there be more rate hikes – wasn’t the Fed supposed to be almost done?
All of these questions are on the mind of the collective market right now. Inquiring minds want to know!
Treasury Yields Rise
Though markets have a 98% certainty (as of last Friday’s close) that the Fed will leave rates unchanged at this week’s meeting, Treasury yields rose last week.
Rising Treasury yields the week ahead of the Fed meeting may indicate the market’s expectations for the Fed to leave the door open for more hikes after this week’s September meeting.
Crude Oil & Gasoline March Higher
Gasoline reached 2023 highs last week, as rising crude oil prices translate to rising prices at the pump.
Crude for October delivery marched higher last week, adding close to 3.73% and closing last week near $90.77 per barrel.
Oil supply concerns are the focus, as U.S. Crude Oil in the Strategic Petroleum Reserve has declined sharply over the last year (by around 20%).
The Beat Goes On
Things won’t always be all about the Federal Reserve and inflation. But for now, the Fed meeting and subsequent commentary are front-and-center for the markets this week.
The recent mixed, yet higher inflation data is certainly a deviation from what we have seen over the last year. Perhaps a rise was to be expected, given interest rates have remained firm even as we’ve gotten more tame inflation prints over the last year or so.
Regardless, we will keep our eyes on the Fed this week, looking for any clues or direction on future policy.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. equity indices were moderately lower last week, with the tech-heavy Nasdaq lagging behind the S&P 500 and the Dow Jones Industrial Average. Overall, megacap tech fared better than small-cap tech.
Tallying results from last week, the S&P 500 decreased by 1.29%, the Nasdaq 100 fell by 1.36%, and the Dow Jones Industrial Average declined by 0.75%.
Strong Services Sector
Economic activity expanded in the services sector again last month, marking an eighth straight month of expansion.
Given that economic expansion in services is constructive, it can make some folks wonder: “Why haven’t rate hikes cooled down services?” Perhaps this mentality contributed to last week’s lackluster showing in stocks, with Treasury yields rising.
However, as the services sector remains strong, so do the prices that come along with it. This logic begs folks to reconsider where the country is at inflation-wise.
The question arises: Has inflation cooled sufficiently for the Fed or is it persisting enough to keep hiking rates? Does the Federal Reserve (Fed) have more work to do?
Fed Expectations
Well, we are about to find out next week if the economy has done what it needed to do for the Federal Reserve to pause rate hikes. The September Fed meeting will occur on September 19-20, with the rate hike decision coming on the afternoon of the 20th.
As of last Friday’s market close, Fed Fund futures favored the Fed leaving rates unchanged (92% probability). If that happens, the Fed target rate would remain at current levels of 5.25% – 5.50%.
But a week can be a long time in markets and economics, especially when it comes to the Fed. Plus, we have some economic data to get through first, namely Consumer Price Index and Producer Price Index data. These reports are on the table for this week and will impact the Fed’s decision.
Inflation Data on Tap
So yes, it is time for the monthly check-in on inflation via the Consumer Price Index (CPI) and wholesale pricing via the Producer Price Index (PPI).
The “cooling inflation” narrative has shifted in recent weeks as inflation persists and Treasury yields have risen overall.
Preliminary estimates for CPI show a 3.6% increase year-over-year – that’s a higher expectation than the last two months (3.3%, 3.1%). Month-over-month expectations are also high, with the forecast being a rise of 0.6%.
We haven’t seen a monthly rise in consumer pricing of 0.6% or higher since the July 2022 data release, which showed a June month-over-month increase of 1.3%. So, the market is on alert. Ideally, the expectations are on the high end of the range, and the number comes in below expectations.
Thinking logically, however, prices still seem stubbornly high for a wide range of goods and services. Time will tell!
September Seasonality
September is known to be a volatile month for stocks historically, yet there are no concrete ways of knowing what will happen this month.
Markets have been surprising this year. If you were to ask someone where the S&P 500 would be if the Fed raised rates to these levels as fast as it did, I don’t think many would say 4400-4500!
Ultimately, it’s important to keep in mind that it’s just one month out of twelve. After all, it is the long term that matters.
The Takeaway
It’s all about inflation data this week and the market’s reaction to it. With the Fed meeting on tap next week, market participants will want to see further evidence – in the form of lower-than-expected inflation data – that the Fed will leave rates unchanged.
Could the rate hike probabilities shift dramatically if inflation numbers run hot this week? They could. And should inflation run hot again, we can expect Treasury yields to rise in anticipation of next week’s Fed meeting and interest rate decision.
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
After a strong July, major U.S. equity indexes retreated slightly yet remained resilient in August. Treasury yields captured the market’s attention for much of the month.
Here is the tale of the tape for the month of August: The S&P 500 ($SPX) declined by 1.77%, the Nasdaq 100 fell by 1.62% ($NDX), and the Dow Jones Industrial Average ($DJI) declined by 2.36%.
S&P 500 Makes It 5 for 6
U.S. stock indexes have been good to investors in 2023, even with several headwinds in play. So, major averages taking a mild breather in August is OK, with the S&P 500 breaking a five-month winning streak. Markets don’t go up or down in a straight line!
Energy Strength
Looking at stock sectors, energy was the one gainer of the eleven S&P Dow Jones Indices in August, as declining crude oil inventories translated to higher crude oil prices.
America’s SPR (Strategic Petroleum Reserve) is still near a 40-year low, with no signs of replenishment anytime soon. As of September 5, the national average gasoline price was $3.812 per gallon for regular, according to data from AAA.
Jobs Picture: Fed Delight?
The employment situation was mixed in August.
The month brought a jobs gain of 187,000 reported versus estimates for 170,000, according to the Sep 1st data release. Unemployment, however, rose to 3.8%, the highest level since February of 2022.
The “real” unemployment rate (also known as the U-6 unemployment rate) rose to 7.1% in August, the highest since May 2022. The U-6 rate includes people who want to work but have given up searching and part-time workers who cannot find full-time work.
So, with the unemployment rate ticking higher, have the aggressive rate hikes by the Fed served their purpose yet? Let’s measure inflation next to add to the picture.
Inflation Data Mixed
The most recent Inflation data (July) implied a mixed picture. Here’s the latest:
Consumer Price Index (CPI) – July CPI rose less than expected, showing a rise of 3.2% year-over-year versus 3.3% expectations. This, of course, is a good sign for the inflation battle. However, the 3.2% annual number marked an increase from the 3.0% rise in June, the first such rise in 13 months.
Market reaction to the data was initially positive, but the overall daily gains in major equity indexes were mostly given back by the market close on the day of the data release.
Producer Price Index (PPI) – After markets digested the mixed reading on CPI, Producer Price Index (wholesale inflation) was in focus.
The wholesale pricing metric rose 0.3% in July on a monthly basis, higher than the estimates of 0.2%. The rise was the biggest monthly gain since January and a jump from an unchanged reading in June.
The wholesale pricing data could be viewed as a precursor to higher consumer prices.
Treasuries
Credit rating agency Fitch downgraded the U.S. government’s credit rating from AAA to AA+ at the beginning of August. The downgrade was due in part to the high/growing debt burden.
Rising Treasury yields were a prevailing theme for most of August, with higher yields noted across the curve. 2-year yields crossed the 5% level but finished the month near 4.85%.
10-year notes fared similarly, closing the month of August near 4.094%, also off its highs set earlier in the month. A rising yield typically means investors are gravitating toward higher-risk investments that can produce higher rewards–an indication of investor confidence (as opposed to a falling yield, which signals investor caution).
Interestingly, yields did not move much initially on the Fitch downgrade but moved higher mid-month on strong economic data. They ultimately cooled down some towards the end of the month, perhaps in anticipation of tame labor data.
Rate Hike Probabilities
With the next Fed meeting right around the corner on September 20th, the chances of a rate hike at the meeting seemed slim to start the month. Perhaps the August labor data showing higher unemployment helped to cement these probabilities, indicating the Fed’s hikes have cooled the economy.
You can check out current probabilities via the CME FedWatch Tool.
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Major U.S. equity indexes were mixed last week, with tech leading the way and industrials lagging for the week.
Tallying last week, the S&P 500 rose by 0.82%, the Nasdaq 100 increased by 1.68%, and the Dow Jones Industrial Average was lower by 0.45%.
The Federal Reserve
At the annual gathering at Jackson Hole of central bankers from around the world, Federal Reserve Chair Jerome Powell said that the Fed is “prepared to raise interest rates further if appropriate” and that inflation is “too high”.
“We are attentive to signs that the economy may not be cooling as expected,” Powell said. “We are prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective,” said Powell.
Ultimately, Powell sounded rather hawkish in his commentary last Friday at the central banker gathering. Major stock indexes mostly shrugged off the comments as they were released, with the S&P 500 moving lower initially but turning higher Friday afternoon to close out the week.
Treasury Yields Mixed
The 2-year yield finally breached the key psychological level of 5.00% with conviction last week and settled near 5.08% last week. The weekly close in the 2-year yield is the highest since 2007.
10-year yields finished the week slightly lower after trading at levels also not seen since 2007. The yield on the 10-year closed the week near 4.240%, a decline from the previous week.
The 2/10 yield curve remains inverted, and last week’s trading action shows this type of trade/outlook is alive and well.
Oil Retreats
Some good news for consumers: crude oil traded lower last week for the second week in a row, hopefully translating to lower gas prices shortly.
Earlier in the summer, crude oil was on the rise for seven straight weeks, touching a high for the year earlier in August north of $84/barrel.
Jobs Data This Week
With a more hawkish-sounding Fed in the headlines, traders and investors will be paying extra attention to this week’s August jobs data release.
Last month, 187,000 new jobs were created, coming in below analyst expectations. For August, the bar is set low, with early estimates showing 170,000 jobs expected.
With the Fed citing the economy not cooling enough, this jobs report will be key.
Wrapping Up
Short-term Treasury yields have moved higher, and the Fed is broadcasting a “higher rates for longer” narrative right now.
August jobs data will be a big one on the radar for this week, setting the market tone for the fresh month of September. Fed-wise, a weak jobs number could be the best thing for equities this week.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock market indexes declined last week, as the S&P 500 fell by 2.11%, the Nasdaq 100 traded lower by 2.22%, and the Dow Jones Industrial Average decreased by 2.21%.
Perhaps the most recent Federal Reserve meeting minutes contributed to last week’s broad asset price declines. Notes from July’s Fed meeting showed that Fed officials see “upside risks” to inflation, potentially leading to more rate hikes. However, Fed officials were ultimately divided on the need for more rate hikes at the July 25-26 meeting.
Some officials cited the economic risks of rising rates further, while others continued to prioritize getting inflation under control through further rate hikes.
Jackson Hole Symposium
Markets like clarity and certainty, so eyes will be on the Jackson Hole Symposium this week.
Last year, Federal Reserve Chair Jerome Powel warned at this meeting of economic pain. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
U.S. Dollar Rises, Commodities, Cryptocurrencies Decline
In a mostly “risk-off” style of trading last week (meaning investors were risk-averse), the U.S. Dollar rose against other major currencies last week.
This contributed to declines in dollar-denominated assets, including oil, gold, and crypto.
Government Bond Yields Rise
Markets like certainty, and if they can’t have that, they look to bond yields for clues about the direction of the U.S. economy.
Notably, Treasury yields have been rising for the last few weeks, even though the recent prevailing summer narrative was that the end of rate hikes was in sight (which should have led to lower yields).
Perhaps the bond market is trying to tell us something. In case you’re curious, this CNN article briefly but clearly explains the relationship between yields, the stock market, and interest rates.
Retail Sales Unexpectedly Strong
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Consumer resilience is nothing short of amazing, as data for July showed a surprise uptick in spending. Can it continue?
Here are July’s highlights:
Americans have been continuing to spend impressively. However, credit card debt continues to rise, and savings have been drying up.
Perhaps the talk in recent months of inflation beginning to recede has motivated consumers to spend, but let’s remember that credit card bills always come due.
The Takeaway
The narrative could shift to a potentially “higher for longer” interest rate hike campaign, given a divided Fed and rising bond yields. Markets will seek clarity this week out of Jackson Hole.
Retail sales provided a bright spot in sentiment last week in an otherwise risk-averse market that saw higher bond yields and a higher U.S. dollar.
Perhaps the short-term negative sentiment is overdone, perhaps it is not. It ultimately doesn’t matter for long-term investors, although some may use lower equity prices to increase asset allocation, should risk tolerance and investment objectives warrant such a move.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
U.S. stock indexes were mixed last week, courtesy of producer pricing data running a bit warm and bank credit downgrades in the spotlight. However, consumer pricing came in slightly lower than market expectations.
By last week’s close, here was the weekly tale of the tape: the S&P 500 retreated marginally by 0.31%, the Nasdaq 100 shed 1.62%, and the Dow Jones Industrial Average finished the week higher by 0.62%.
Moody’s Cuts Bank Credit Ratings
Moody’s, a “big three credit rating agency,” cut their ratings for several small- and mid-sized banks early last week.
“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Moody’s analysts said in the accompanying research note detailing the decision.
Moody’s also placed some larger banks under negative watches, meaning they’re being reviewed for potential downgrades.
The bank credit downgrades come after the previous week’s downgrade of the U.S. credit rating by Fitch Ratings.
July Inflation Data Mixed
Inflation data for July implied a mixed picture. Here’s the latest.
Consumer Price Index (CPI): July CPI rose less than expected, showing an uptick of 3.2% year-over-year versus 3.3% expectations. This was a good sign amid our continued inflation battle. However, the 3.2% annual number marked an increase from the 3.0% rise in June, which was the first such rise in 13 months–not so good.
Market reaction to the data was initially positive, but overall daily gains in major equity indexes were mostly given back by market close last Thursday.
Producer Price Index (PPI): After markets digested the mixed bag on CPI last Thursday, Friday’s Producer Price Index (PPI) was in focus.
The wholesale pricing metric rose 0.3% in July on a monthly basis, higher than the estimates of 0.2%. The rise was the biggest monthly gain since January and a jump from an unchanged reading in June.
The wholesale pricing data could be viewed as a precursor to higher consumer prices.
Treasury Yields Rise
While the consensus narrative in recent weeks seems to indicate lower interest rates, rising Treasury yields could be telling a different story in the last few weeks.
Yields for the 10-year note closed near their highs for the week last week and closed out the week near 4.167%, up from the prior weekly close near 4.061%.
2-year note yields also rose last week, closing the week near 4.899%, close to the psychologically important 5.0% level.
Putting It Together
The U.S. debt downgrade was already being digested by the markets when a new slew of bank downgrades added more focus to creditworthiness.
Talk of rising consumer debt and weaker consumer spending could make it into more headlines soon, creating some headwinds for the market in the short term.
Market reaction was rather muted last week on the mixed inflation data and bank downgrades, but rising Treasury yields could be on the market’s radar this week and in the short term.
Ultimately, however, it is the long term that matters. Markets and sentiment can change quickly. That’s why it’s important to stay focused on the long-term strategy with discipline.
This week, attention will turn to retail sales as an indication of consumer health, along with the meeting minutes from the last Fed meeting.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock market indexes traded in a mixed fashion last week–with sector rotation on display. A big week full of corporate earnings and the Fed is now on deck.
Tallying last week, the S&P 500 was higher by 0.69%, the Nasdaq 100 was lower by 0.90%, and the Dow Jones Industrial Average was higher by 2.08%.
Dow Jones Industrials Lead the Way
When was the last time you heard that one? Well, last week (perhaps courtesy of some mega cap tech earnings and guidance that underwhelmed investors), we saw the old-school Dow 30 leading the way, indicating sector rotation and potential further broadening of the recent stock market rally.
The Dow has seen ten consecutive positive trading sessions–its longest rally since 2017. Who doesn’t love a solid dividend-paying industrial stock? Diversification is key.
Fed Meeting Expectations
Even as inflation has been cooling, the Fed remains in the spotlight as the July meeting approaches on July 26th.
Expectations as of last Friday’s market close have virtually cemented the likelihood of a 25 basis point hike this week. Weekly closing data showed a 99.2% probability of such an occurrence, according to the CME FedWatch Tool.
Looking beyond the July meeting, what will Chair Powell broadcast about the next Fed meeting (September)? The CME FedWatch Tool shows a probability of 83.5% that the Fed will leave rates unchanged in September–as of the time of writing.
Jackson Hole Symposium
While there is no Fed meeting in August, there will be the annual Jackson Hole Symposium–which is known for monetary policy moves and plans.
The title theme of this year’s gathering of global monetary policy leaders is “Structural Shifts in the Global Economy,” and will take place Aug. 24-26.
Economic Data Incoming
Consumer Confidence, Advance GDP, Unemployment Claims, and the Core PCE Price Index are all on the calendar. We know the Fed will be paying attention to their favorite inflation indicator in Core PCE on Friday, even though it comes after the rate decision on Wednesday.
Are you craving more economic data? Here is a solid great write-up on this week’s economic data releases.
The Takeaway
Consider the market environment a year ago compared to now. All anyone wanted to consider was the Fed a year ago–and how big rate hikes would be. It’s now a different story, with more emphasis on corporate earnings and guidance along with sector rotation. It is a healthier investment environment overall.
Market narratives are dynamic, and we are now seeing a more healthy narrative with an earnings-driven stock market combined with a Fed-driven one.
The July 26th Fed meeting has market expectations of producing a 25 basis point hike, according to the CME FedWatch Tool. Market watchers will pay attention to the statement and subsequent press conference for clues regarding the Fed’s outlook for the remainder of 2023.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Overall, the S&P 500 gained 2.42%, the Nasdaq 100 surged higher by 3.52%, and the Dow Jones Industrial Average increased by 2.29% for the week.
Consumer Inflation – Cools for Twelfth Straight Month
All eyes were on June Consumer Price Index (CPI) data last week, and the consumer pricing data did not disappoint! The release showed softer gains in food, used vehicles, and airline prices. Have you noticed different pricing on certain items in your world?
Given that the 4% yearly CPI metric in May decreased to 3% in June, stock investors had lots of reasons to cheer.
Producer Pricing Rises Less Than Expected
In a double whammy of cooling inflation data last week, softer wholesale pricing also offered more signs of encouragement in the inflation fight.
Expectations were for a 0.2% rise in monthly producer pricing, according to economists surveyed by Dow Jones, while final data showed an even smaller rise of 0.1%.
With wholesale costs moving lower, we can hope for lower prices to trickle down to the consumer level further at some point soon (if it wasn’t for those darn corporate profits!).
Surely though, businesses have realized the longer-term effects that inflation has created for consumers and will react appropriately. It indeed feels like food pricing has been slightly lower lately when grocery shopping, at least on some items.
Could inflation be in the rearview mirror soon?
Stock Rally Broadens
It’s the stuff that stock market historians and active participants love to see. The recent stock market rally broadened last week, with strength seen in many sectors and indexes, including small-cap stocks and the Dow Jones Industrial Average.
A broadening stock market rally with more stocks participating in upward pricing is a healthy development versus price advances in only a select group of stocks (such as tech).
July Rate Hike on the Table
The CME FedWatch tool showed a 96.1% chance of a Fed rate hike at the July 25-26th meeting as of Monday morning. This comes after the Fed paused its rate hike campaign at its June meeting. The widely expected rate hike begs the question: “If inflation is cooling, why are we still hiking rates?”
Thinking back, when inflation first reared its ugly head, the Fed had deemed it “transitory.” Remember that? Well, perhaps the Fed doesn’t want to make the same mistake twice–getting too complacent about inflation and risking it coming back with a vengeance as it did in the 1980s.
For the remainder of the year, expectations range from one more hike after the July meeting to the Fed completing its rate hike crusade at the July meeting. For its part, the Fed broadcast at the June meeting that there would be two more rate hikes, one of which would be at the July meeting.
Last Week = “Healthy” Market
If you listen to the talking heads on TV (the knowledgeable ones, anyway!) or chat with market veterans, they will emphasize the broadening of the stock market rally as being a healthy sign, and it is. There seems to have been a shortage of folks calling for the recession in recent weeks, with markets liking the cooling inflation and what appears to be the Fed nearing the end of its rate hike cycle.
As long-term investors, recent stock market strength does not drastically impact our thinking; our investing attitude remains consistent throughout all phases of market cycles. Long-term investing has enjoyable periods, and the last couple of months have been one of those periods.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock indexes took a breather last week as labor markets showed signs of softening after being strong and resilient for an extended period of time.
Tallying last week, the S&P 500 fell by 1.16%, the Nasdaq 100 declined by 0.94%, and the Dow Jones Industrial Average decreased by 1.96%.
Jobs Data Misses Estimates
After a logic-defying run in monthly jobs growth, payroll additions for June finally showed softening. Missing analyst estimates of 240,000, June payrolls showed 209,000 jobs added–still a decent number. The latest data for June showed leisure and hospitality cooling, adding only 21,000 jobs for the month. The sector has been a major job growth driver over the last three years.
Unemployment slowed, clocking in at a 3.6% rate, down 0.1% from the prior month, but let’s understand that the unemployment rate data is not all-encompassing.
When factoring in “discouraged workers” and only part-time workers, another metric shows unemployment running at 6.9%, which makes more sense.
Jobs may have fallen in June, but the overall labor market remains strong.
“This is a strong labor market where demand for higher paying jobs is clearly the trend,” said Joseph Brusuelas, chief economist at RSM. “So, I think it’s no longer appropriate to talk about an imminent recession, given those strong gains in jobs and wages.”
Government Bond Yields Rise
The 10-year yield finished near 4.049% last week, closing the week higher than the previous week’s close near 3.82%.
2-year yields rose as well last week, but interestingly, at a slower pace than 10-year yields.
Perhaps this is an early indication of the inverted yield curve (a key recession indicator) softening. Time will tell!
Bond Market Expectations
Are we there yet? Similar to kids in the back seat of a car, many market watchers pose this question to the Federal Reserve as concerns about higher rates persist.
As of last week’s market close, expectations showed a 93% chance of a 25-basis-point hike at the July Federal Reserve meeting.
These renewed probabilities of continued Fed rate hikes contributed to last week’s softer equity market. Fed meeting minutes released last week reinforced rate hike continuation expectations.
Oil Rallies
Notice lower gas prices lately? They may be on the way up again. You might want to fill up now!
Crude oil futures for July delivery caught a bid last week amid the summer driving season, even though that season historically begins around Memorial Day. Supply concerns were also in focus during last week’s trading.
The average price for regular unleaded gasoline is $3.538 as of July 9th, according to data from AAA.
The Week Ahead
This week, attention turns to Consumer Price Index (CPI) inflation data on Wednesday. This CPI report will be the last consumer inflation metric the Fed will have going into its July meeting. So, markets are eager to see if the inflation moderation continued into June and how it could affect Fed rate hike probabilities later this month.
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