S&P 500: -0.16% DOW: 0.12% NASDAQ: -0.39% 10-YR: 4.32%
Traders shrugged off everything from hot inflation data to additional rate hikes in Europe as equity markets ground higher during most of the week. However, those gains could not be held as Friday saw broad-based selling on fresh data showing consumer sentiment fell and a looming Fed decision next week. Additionally, quarterly triple witching added to the spike in the volatility gauge after it hit its lowest level since 2020. Treasury yields rose 6 basis points and oil notched its 3rd weekly gain as the market continued to tighten on the back of production cuts from Russia and Saudi Arabia.
The key inflation report Wednesday was more bark than bite in terms of price action, however, it gave investors more clues on where the Fed will go concerning policy in 2023. It is very likely that the Fed will keep rates steady next week. However, if the disinflation trend truly begins to stall out as seen in recent reports, and elevates over the Fed's 2% target, it is expected the Fed will respond by year-end. Traders are also attempting to price in the UAW strike and its impact on not only supply chains and profit margins but the broader US economy.
Beneath the surface, it was a mixed theme. Utilities led their peers in what could be perceived as a flight to safety while Technology was the largest decliner by a wide margin.
CPI rose 0.6% in August, its biggest monthly gain of 2023, and 3.7% from a year ago
The core CPI increased 0.3% for the month and 4.3% year over year respectively
Inflation-adjusted average hourly earnings declined 0.5% for the month
Energy prices fed much of the headline gain, rising 5.6% on the month
Shelter costs, which make up about one-third of the CPI weighting, climbed 0.3%
The key takeaway - Despite CPI showing the largest increase in headline inflation so far this year, the report largely falls within the expected range, and it is unlikely to alter expectations for the Federal Reserve's actions. Energy prices played a significant role in this increase but are volatile and largely beyond the direct influence of the Fed. Housing costs have also contributed to elevated inflation levels due to a lag in how this sector's metrics flow to CPI. However, other indicators of housing cost growth have notably slowed, which should exert a moderating influence on headline and core inflation figures in the coming months. While the absolute level of inflation remains a concern for the Fed, the overall trend is moving in the right direction, and the fundamentals mostly support the Fed maintaining a pause in rate hikes at the September meeting.
Sales at U.S. retailers rose 0.6% in August despite a hangover for internet stores after the Amazon Prime Day
Higher than forecast of a 0.1% rise
Sales at internet retailers were flat last month after a 1.5% gain in July
Receipts at gas stations rose 5.2% due to higher fuel prices
Sales edged up 0.3% at bars and restaurants
The key takeaway - While the headline retail sales figure may initially suggest robust retail performance, it conceals the influence of energy sales. The surge in oil prices over the past couple of months has boosted gas station revenues and, consequently, the overall retail sales number. Without this spike, retail sales would likely have experienced a decline. Higher fuel expenses have a negative effect on consumer spending, leaving individuals with less discretionary income for other sectors of the economy. Ideally, we hope to see gas prices moderate from their current levels, but this pressure is expected to compound with higher interest rates and elevated overall prices due to inflation, dampening consumer spending going forward. Additionally, student loan repayment are set to restart in the coming weeks. Nevertheless, the consumer strength has been a surprise throughout this year and may have more gas in the tank.
The European Central Bank (ECB) raised its policy rate by 0.25% to 4.00%, the highest level in the organization's history
This marks the 10th straight rate increase in this hiking cycle
New economic forecasts published by the ECB Thursday suggested that eurozone growth will slow significantly more than previously expected
The bank raised its forecast for inflation next year from 3% to 3.2%, mainly to reflect “a higher path for energy prices.”
The key takeaway - The ECB faces an exceedingly challenging situation due to the toxic dynamic of inflation persistently exceeding its target and an economy displaying consistent signs of deceleration. To address the inflationary issue, the ECB has implemented rigorous yet essential policy measures. However, the latest projections show a pessimistic outlook causes by the added pressure these rates apply to Europe's fragile economy. Despite President Lagarde's remarks hinting at the possibility of further policy tightening, some committee members advocate for maintaining the current level of rates. Market expectations lean towards this being the final rate hike.
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