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2020 Financial Markets Update

Week in Review: September 16, 2022

September 19, 2022

Recap & Commentary

Markets suffered their worst week since mid-June, as measured by the S&P 500, following disappointing inflation data that reinforced expectations that the Federal Reserve will remain aggressive in its inflation-fighting efforts. A disappointing earnings report from FedEx also added to the market’s gloom. Interest rates moved higher as markets priced in a 100% probability for a 0.75% rate hike at the Fed’s upcoming meeting and even priced in a ~20% probability of a 1.0% rate hike. At the short-end of the yield curve, the 2-Year Treasury yield rose 0.31% to 3.87%, its highest level since 2007, while the 10-Year Treasury yield gained 0.14% to end the week at 3.45%. Mortgage rates also advanced, with the 30-year exceeding 6% for the first time since 2008.

Despite the further deceleration in the year-over-year pace of headline inflation, core inflation, which excludes food and gas prices, rose for the first time in five months, pointing to growing price pressures across other categories. That fueled concerns about inflation becoming “entrenched”, something the Fed is trying to avoid, thereby leaving the Fed unable/unwilling to slow its pace of rate hikes for now. One good piece of inflation news was that survey data from both the Federal Reserve Bank of New York and the University of Michigan, which conducts the Consumer Sentiment survey, showed consumers’ inflation expectations for the next 1-, 3-, and 5-years continue to decline.

FedEx, often viewed as a bellwether of economic activity, announced plans to close 90+ stores, delay hiring, temporarily park some aircraft, and cancel certain spending plans. The moves come in response to slowing demand which the company expects to continue in the months ahead. The announcement added to growing concerns about slowing global economic growth.

Economic Commentary

Headline consumer inflation (CPI) rose 0.1% in August after being unchanged in July. A 10.6% decline in gasoline prices was offset by further gains in shelter, food, and health care prices. Food prices rose 0.8% in the month. Compared to a year ago, headline inflation slowed from 8.5% to 8.3%. Core inflation rose 0.6% in August, twice the pace recorded in July, while the year-over-year pace jumped 0.4% to 6.3%. The rebound in core inflation led to investor angst about future Fed rate hikes.

The annual pace of producer inflation (PPI) slowed from 9.8% to 8.7% aided by declining energy prices. On a monthly basis, PPI inflation fell -0.1%, marking the second consecutive month of outright declines. Further moderation of PPI would likely benefit CPI.

Retail sales rebounded in August, rising 0.3% compared to July’s 0.4% decline.  Declining gasoline prices allowed consumers to spend on other items including cars which saw a large uptick during the month. Excluding auto sales, retail sales fell 0.3% suggesting perhaps some caution on the part of consumers.

Of Note

Mortgage rates breached 6% for the first time since 2008, nearly double where they stood at the start of the year.  For a $1M home financed with a 20% down payment and 30-year fixed mortgage, the rise in rates since January adds an additional $1,380, per month, to a homeowner’s monthly mortgage payment.

S&P 500-4.8%
Small Caps-4.5%
Intl. Developed-2.7%
Intl. Emerging-2.7%
U.S. Bond Market-0.9%
10-Year Treas. Yield3.45%
U.S. Dollar0.6%
WTI Oil ($/bl)$85
Gold ($/oz)$1,685

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • S&P Global PMI
  • Weekly Jobless Claims

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