Short On Time… Executive Summary
Sorry, this one is not so short. Inflation was flat last month. I recall someone telling you that in one of these newsletters a week or two ago. Anyway, the market has IDS (Inflation Derangement Syndrome). It is hung up on inflation at the moment. The big news this week is what Fed Chair Kevin Warsh says and does about interest rates on Wednesday. The talking heads are calling for rate hikes so the Fed can maintain “credibility.” Last time I checked the Fed had plenty of credibility because the market hangs on every word that comes out of those meetings. Here’s the dilemma, is Warsh looking at the economy or the market, because there is a difference. The economy is not overheating. Real estate is stagnant at best and oil prices are starting to smart a bit. Oil is what is driving current inflation higher. Raising rates because of higher oil risks pushing the economy down the hill. A rate hike is rarely a one and done scenario. Typically, it would mean there are more to come. The market has been pushing rates higher all year. The 10-year U.S. Treasury yield was around 4.00% at the beginning of the year and today it sits at 4.99%. A lot of loans like mortgages and car loans are based on the 10-year Treasury. This would already be slowing the economy.
Kevin Warsh has been talking tough on inflation and that they have failed to get core inflation down to 2.0%. Well, core inflation is currently at 2.40%. Above the target, but not miles above it. If oil comes down the inflation numbers will come down. So, we will find out Wednesday what the Fed thinks. We are also close to midterm elections and pushing rates around near an election is highly controversial. I’m telling you all of this because it is all that matters to the market this week. Whatever happens with rates on Wednesday will set the tone until the midterm elections are over. September is usually the most volatile month of the year. Treasury Secretary Scott Bessent has been buying back treasuries in the open market to try and get yields to come down. I have to believe he and Fed Chair Warsh talk and wouldn’t be working against each other, but we will find out Wednesday.
The Week On Wall Street
Stocks fell over a shortened trading week as higher oil prices rattled investors. The Standard & Poor’s 500 Index declined 0.80 percent, while the Nasdaq Composite Index edged down 0.66 percent. The Dow Jones Industrial Average fell 1.57 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, skidded 1.39 percent.
Sluggish Start
Stocks fell in response to higher oil prices at Tuesday’s opening bell as investors returned from the long Labor Day weekend. Investors kept one eye on diplomatic efforts in the Middle East and another on fresh inflation reports due out later in the week. Stocks were under pressure again on Wednesday as oil prices continued climbing. After the Treasury Department announced it was tripling its long-dated debt buyback program (to as much as $6 billion), the yield on the 10-year Treasury note rose to a 3-year high. Investors continued to fret over inflation as the week progressed, putting further pressure on stocks. On Friday, stocks rebounded after news that annualized inflation held steady in August, puzzling some who expected stocks to decline. Oil prices fell, and markets rebounded to finish a tough week on an upbeat note.
Inflation Reports
Wholesale inflation was released on Thursday; PPI, or the Producer Price Index, rose 0.4 percent in August over the prior month, in line with expectations. Stocks were under pressure despite the tame results. But on Friday, the latest CPI (Consumer Price Index) report showed that year-over-year retail inflation in August held steady at 3.4 percent. Traders appeared to look past the report, with the question shifting from whether the Fed will adjust rates this year to how many times the Fed may need to act.
This Week: Key Economic Data
Tuesday: Federal Open Market Committee (FOMC) Meeting, Day 1.
Wednesday: Federal Open Market Committee (FOMC) Meeting, Day 2. Retail Sales. Import Prices. Manufacturing & Trade Inventories. NAHB Housing Market Index. Fed interest rate decision.
Thursday: Housing Starts. Weekly Jobless Claims. Pending Home Sales.
Friday: Industrial Production. Capacity Utilization. Leading Indicators.
This Week: Companies Reporting Earnings
No major companies are reporting this week.
Stay tuned...
