Markets have been relatively quiet despite signs of lingering inflation and chaos in the Middle East.
The Week That Was
Friday’s September inflation report showed the monthly core CPI up at a 3.9 percent annual rate and the total up close to a 5 percent rate. The three-month and six-month core
CPI rates are 3.1 percent and 3.6 percent, respectively.
These numbers are consistent with our assumption that inflation has settled in the 3 percent to 4 percent vicinity.
Prices at the wholesale level reversed their 2 percent to 3 percent trend. September core prices for finished goods rose at a 3½ percent rate, with the three-month increase at a 4½ percent annual pace.
The recent uptick in producer prices, combined with signs of continued growth, indicates potential problems in quickly reaching the Fed’s inflation target.
Things to Come
Tomorrow, the October Homebuilders’ Index is likely to confirm September’s move into
negative territory.
After a brief two-month shift to a slightly positive outlook, the September index reading of 45 indicates a negative environment for new homes. Further increases in mortgage rates should keep sentiment in negative territory.
Also tomorrow, the government will report estimates of September retail sales. August retail sales soared at a 7 percent annual rate. Even with this jump, the six-month change in retail sales was zero.
Unfortunately, retail sales data are among the least reliable data and are subject to large revisions. This makes it difficult to place much significance on whatever the upcoming release shows.
The Fed’s September measure of manufacturing production is also due tomorrow. The measure, which had been close to 100 for the past two years, jumped to 103.5 in August.
The increase is completely at odds with business surveys, which show manufacturing flat to down for the current year. Hence, there remains a great deal of confusion over where the economy has been, not to mention where it is heading.
Money, Money, Money
Last week’s inflation news didn’t help either the Fed or long-term interest rates. Both wholesale and consumer inflation moved higher in September.
Although yearly core inflation numbers continued to trend lower, monthly numbers moved higher for a second month in a row, with the monthly core CPI back in the 4 percent vicinity.
The Fed has one more inflation report before its next policy announcement, on November 1st.
At the end of next week, the Fed’s favorite inflation measure (personal consumption deflator) is due. This measure differs from the CPI in that it reduces the weight of areas where consumers cut back due to higher prices. As a result, it often provides lower
inflation numbers than the CPI.
We expect this upcoming measure to continue to show inflation in the 3 percent to 4 percent vicinity. If so, it won’t help the Fed.
Long-term interest rates are down slightly from their peak of 4.8 percent for the 10-year Treasury. Although we hope long-term rates will move lower, the trifecta of lingering inflation, Treasury debt demand, and the Fed’s security sales has the potential to send interest rates still higher. Investors should remain cautious about holding stocks and bonds.
Market Forces
Stocks were mixed last week. The S&P500 rose 1 percent, and the Nasdaq 100 was down 2 percent. The other indexes were slightly higher or lower.
Outlook
Economic Fundamentals: restrictive
Stock Valuation: S&P 500 overvalued by 15 percent
Monetary Policy: restrictive
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