Short On Time… Executive Summary
Well, now we know what Warsh and company are looking at, and it isn’t so much the economy. Warsh wants the inflation number to crack. Two ways for this to happen, either the Fed destroys demand by pushing rates too far or oil prices begin their descent. I’d prefer the latter. As I mentioned last week, it is never one hike and done. Usually, we are in for a series of hikes unless oil comes down. Oil is the catalyst in this current “inflation panic.” Again, I think the market has “inflation derangement syndrome” (IDS for short). If you look at inflation and its current level, it really isn’t that far out of the norm. This is why I call it IDS. Powell wasn’t an inflation hawk, but Warsh appears to be. Noted. Warsh also proved he isn’t Trump’s lackey and the Fed is independent. Trump was uncharacteristically quiet about it. Maybe the agreement everyone thought was made about the President, and the Fed was the other way around. Maybe Warsh said, “I will do this job if you keep quiet about it.” Ha, one could hope. The stock and bond market liked the Fed asserting its independence and maybe that is the medicine we needed. Time will tell.
For now, the stock market is okay with the hikes. Some of this is because it was somewhat priced in and part of it is that yields on the 10-year treasury note have stopped going up, for now. Things like mortgages and car loans are priced based on this yield. If the 10-year note yield increases, so do the borrowing costs on many loans like mortgages and auto loans. Stocks are rallying today because oil is down. That is the thesis lately. Oil up, stocks down or oil down and stocks up. I’m afraid this will be the status quo until we get back into earnings season again in October. Then, we have the midterm elections.
The Week On Wall Street
Stocks ended last week mixed as investors navigated the Fed’s rate decision, Treasury yields, oil prices, and the volatile AI trade. The Standard & Poor’s 500 Index declined 0.09 percent, while the Nasdaq Composite Index rose 0.72 percent. The Dow Jones Industrial Average fell 1.70 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, skidded 1.32 percent.
Mixed Markets
Stocks opened lower to start the week as safety concerns tempered the artificial intelligence trade and oil prices rose. Markets slid again over the next session as the bellwether 10-year Treasury yield rose above 5 percent to a 19-year high. Markets steadied midweek as investors awaited the Fed's decision on the final day of its September meeting. The Fed raised short-term interest rates by a quarter percentage point in a widely anticipated decision, reflecting inflation concerns. Stocks fell following the decision, but declines in the broader market were modest. Stocks rebounded Thursday, clawing back some losses from the prior session. Lower oil prices, falling Treasury yields, and advances in a handful of megacap tech stocks helped lift all three major market averages. But the relief rally stalled out a bit on Friday morning as Treasury yields rose again.
Focus on the Fed
The Federal Open Market Committee voted unanimously to raise interest rates, increasing the Fed Funds rate by a quarter percentage point to a target range of 3¾ to 4 percent. Of the 18 officials who submitted medium-term projections for the Fed’s so-called “dot-plot,” 16 penciled in at least one more adjustment this year. (The FOMC meets twice more before year-end.) In his post-meeting press conference, Fed Chair Kevin Warsh said that “inflation is too high and has been for too long.” He added that despite expanding economic activity, “uncertainty remains elevated, owing in part to geopolitical developments,” and that the Fed’s decision supports a “timelier return” to its goal of 2 percent inflation.
This Week: Key Economic Data
Tuesday: Richmond Fed President Tom Barkin speaks.
Wednesday: Purchasing Managers Index (PMI)—Manufacturing. Purchasing Managers Index (PMI)—Services.
Thursday: Weekly Jobless Claims. New Home Sales. Fed President Barkin speaks.
Friday: Durable Goods. U. Michigan Consumer Sentiment Survey.
This Week: Notable Companies Reporting Earnings
Tuesday: AutoZone, Inc. (AZO)
Wednesday: Cintas Corporation (CTAS), Paychex, Inc. (PAYX)
Thursday: Costco Wholesale Corporation (COST)
Stay tuned...
