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U.S. and International Equities
Markets Finish Lower
Markets worldwide suffered losses amid a hotter-than-expected August Consumer Price Index (CPI) print along with negative leaning Q3 corporate announcements. Given Tuesday’s inflation report, market participants are expecting the Federal Reserve to increase interest rates by at least 75 basis points (b.p.) at its meeting next week to take its short-term interest rate to 3.25%.
With regard to earnings, FedEx cited significant weakness in both European and Asian business activity, along with rising costs and slowing global economic growth in a negative leaning preannouncement. Moreover, General Electric’s (GE) stated that supply-chain challenges will likely weigh on third quarter results as persistent supplier constraints are hindering GE’s production of industrial goods.
According to FactSet, earnings growth expectations for the third quarter are presently showing an increase of just 3.7% year-over-year, which is significantly down from the 9.8% growth estimate as it stood at the end of June. Moreover, analysts have slashed Q3 earnings expectations for every S&P 500 Index sector except energy. Seven out of 11 sectors are now expected to show a year-over-year decline in next quarter’s results.
Fixed Income Pulls Back
The Bloomberg Aggregate Bond Index finished the week lower as inflation and the Fed’s hawkish stance remains the major themes in the bond markets this year. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, underperformed as well mirroring their equity counterparts.
Real yields, which are nominal yields taking into account inflation, continue to climb higher with 5-year, 10-year, and 30-year TIPs (Treasury Inflation Protected) yields the highest they’ve been since 2019. After spending the last two years largely in negative yielding territory, real yields are positive again. Coupled with falling breakeven rates (the difference between nominal and TIPs yields), LPL Research believes that the value proposition for TIPs has improved, particularly for shorter maturity TIPs securities.
Commodities Mostly Lower
Even amid continued energy supply concerns in Europe from the Eastern European conflict, natural gas finished lower for the week and oil is down this week after reaching an annual low on September 7. Lower prices reflecting worries over demand if the economy falters. The metals mostly had a lower showing, as global demand concerns remain, with only silver up during the week.
Economic Weekly Roundup
August’s hot CPI
The August CPI rose over 8% year-over-year from 8.5% in July. Excluding food and energy, the core CPI increased 6.3% and accelerated from the previous month. Both headline and core inflation were higher than analysts expected. Inflation pressures are continuing to ease in a few categories such as gasoline, airfare, and used vehicles.
However, several categories, such as food, where prices increased over 11.4% from a year ago are proving challenging for the economy. Moreover, food witnessed the largest year-over-year increase since 1979. In addition, domestic electricity prices increased 1.5% month-over-month which was the fourth consecutive monthly increase. However, our base case is that as import prices and producer prices ease, the inflation outlook should improve.
August German Wholesale and U.S. Producer Prices
August German wholesale prices increased almost 19% from a year ago. As much as these prices have increased, wholesale growth rates peaked in April when prices were up almost 24% vs. April 2021. Investors should take caution as growth dynamics are more tenuous in Europe compared to other countries.
August U.S. producer prices fell 0.1% from a month ago in contrast with the unexpected monthly rise in consumer prices. Falling producer prices should add downward pressure on domestic inflation.
Weekly Employment Report
Initial claims for unemployment insurance for the latest week came in below the prior week while continuing claims increased. Labor market conditions remain tight even though there are signs of slowing job growth, increasing layoffs, and higher unemployment.
Week Ahead
The following economic data and potentially market-moving events are slated for the week ahead:
Monday: National Association of Home Builders Housing Market Index (Sept)
Tuesday: Housing starts (Aug), building permits (Aug)
Wednesday: FOMC meeting, existing home sales (Aug)
Thursday: Weekly initial and continuing unemployment claims, leading indicators (Aug), current accounts (Q2)
Friday: PMI composite (Sept), Markit PMI manufacturing and service (Sept)
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