Today’s report shows wholesale prices continued to increase at close to a 9 percent annual rate in August. This is well above what the Fed anticipated. The Fed is almost certain to announce plans to taper its purchases of securities.
The Week That Was
Today’s report on wholesale prices shows an increase of 0.7 percent in August, slightly lower than the 1 percent increase in July.
The increase from a year ago was 8.3 percent. Inflationary pressures remain much stronger than the Fed had anticipated.
Weekly initial unemployment claims fell sharply in the first week of September, to 311,000 from 352,000 in August. The decline occurred as federal unemployment payments expired.
There was also a decline in the number of people receiving unemployment payments.
Things to Come
Tuesday’s consumer price report is likely to show a further moderation in monthly inflation. A 7 percent decline in oil prices from July to August will take some of wind out of inflation. The consensus forecast calls for an increase of 0.3 percent to 0.4 percent. This would keep year-over-year inflation in the 4 percent to 5 percent vicinity.
On Wednesday the Federal Reserve will issue its report on manufacturing output in August. The Fed’s measure will be affected by ongoing production cuts by auto companies. Auto companies sharply reduced orders for computer chips amid the pandemic.
At the same time, other chip-reliant businesses increased orders rapidly in response to the demand for remote activities. By the time automakers responded to a sharp recovery in demand, the chips had already been bought.
The Federal Reserve’s manufacturing index appears to rely more heavily on auto companies than other business surveys. This is why it can continue to show more weakness than other business surveys.
Thursday’s report on August retail sales is likely to be disappointing. Retail sales continue to run well ahead of wages and salaries.
For example, retail sales in July were 19 percent above their pre-Covid peak in February 2020. Wages and salaries in July were only 3½ percent above their pre-Covid peak.
Retail sales should either decline sharply or continue to grow more slowly than wages and salaries until they are more in line with earnings.
Market Forces
Stocks moved lower this week. Small caps were down more than 2 percent. The major indexes lost ½ percent to 1½ percent.
The major indexes had moved well above their 50-day moving averages. When this happens, some decline becomes more likely. In this respect, some further modest declines would be normal.
As might have been expected, with the end of various federal unemployment payments, there was a large decline in initial unemployment claims.
That is good news. It likely means the shortage of workers should ease a bit now that the government is not paying people not to work.
President Biden’s $3.5 trillion spending boondoggle is moving through Congress. The odds are high that Congress will pass a substantial multiyear spending bill.
As with other major increases in federal spending, the program will redirect funds from private, productive investments into less-productive government spending. Productivity and growth will suffer.
The S&P500’s ongoing upward trend has lifted it to 28 percent above its fundamental value. With stocks overvalued, a downward move is always possible, particularly if there is unexpected bad news.
In spite of the potential for a downward move in stocks, the Fed’s ongoing purchases of securities should continue to provide sufficient fuel for further gains in stock prices.
Outlook
Economic Fundamentals: positive
Stock Valuation: S&P500 overvalued by 28 percent
Monetary Policy: expansive