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Financial Market Update – Week of 09/11

September 11, 2023

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. 

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