Week in Review: October 13, 2023

October 13, 2023

Recap & Commentary

Markets generally ended the week higher despite facing a number of negative headlines including continued political gridlock in Washington, stubborn inflation readings, and an outbreak of fighting between Israel and Hamas that pushed energy prices higher and risks a larger regional conflagration.

Despite the dour headlines, equity markets were boosted by a pullback in bond yields as well as a positive start to the third quarter earnings season. After pushing steadily higher during the summer, culminating in highs not seen in a decade or more, bond yields pulled back, at least temporarily, over the course week. The declines resulted from comments by multiple Fed officials suggesting that the recent rise in interest rates amounted to tighter financial conditions, replacing (potentially) the need for additional rate hikes. While some officials were more equivocal in their comments, Atlanta Fed President Raphael Bostic stated directly, “I don’t think we need to increase rates anymore.” The recent decline in yields helped alleviate some of the recent pressure facing equity markets.

Third quarter earnings seasons officially kicked off with announcements by major banks including JP Morgan, Wells Fargo and Citigroup. All three banks exceeded analysts’ expectations. After three consecutive quarters of negative growth, consolidated S&P 500 earnings growth is expected to be positive, albeit barley, at 0.4%. If so, that would end the current earnings “recession.”

Economic Commentary

Headline consumer price inflation (CPI) rose 0.4% in September, higher than the expected 0.3% increase. Compared to a year ago, headline CPI rose 3.7%, unchanged from August’s reading. Energy and food costs increased 1.5% and 0.2% respectively. Excluding these measures, core CPI rose 0.3% for the month and 4.1% since last year. Shelter prices which contributed to over half the gain in headline CPI, remained strong, rising 0.6% for the month and 7.2% from a year ago. Inflation also remained an issue in the services sector last month even after excluding shelter. Services ex-housing rose 0.6% in September and has accelerated every month since June. This was the highest monthly increase since September 2022. Overall, the September report reiterated that despite the progress that’s been made on inflation since last year, the final push to return to the Fed’s 2% target is likely to be more challenging.

Inflationary pressure continued to be felt on the producer side as well.  Headline producer inflation (PPI) rose 0.5% in September vs. an expected 0.3% increase.  Final demand goods prices increased 0.9% with much of the increase due to higher energy costs. Services prices increased 0.3% for the month. Despite significant progress since last year, producer prices have increased at a 7.7% annualized rate over the prior three months. Core prices increased 0.3% in September and have increased at a 4.5% annualized rate the prior three months. The market continues to believe the Fed has concluded its hiking cycle, pricing in a 94% probability of no change to the federal funds rate at the November meeting.  However, continued strength in GDP and the job market coupled with sticky inflation could make future policy decisions more difficult.

Of Note

The IRS announced that the tax “gap,” the amount owed but not paid, increased by $87B in 2021 to $688B. The IRS hopes to close that gap moving forward by devoting additional resources to key compliance areas including high-income and high-wealth individuals, partnerships and corporations.

Market Indices   (As of 10/13/2023)

• Retail Sales
• Housing Starts
• Existing Home Sales
• Industrial Production
• Weekly Jobless Claims