Weekly Market Update: Inflation Assessment, Interest Rate Landscape and Sector Performance

  • Consumer credit continues to accelerate.
  • Month-over-month CPI has slowed over the last 12 months, although the core inflation rate remains stubbornly higher than the Fed would like.
  • PPI for final demand is primarily being driven by services.

During the week, major stock market benchmarks had mixed results due to a balancing act between concerns about inflation and the recent increase in long-term interest rates. Value stocks performed better than growth stocks, with the Dow Jones Industrial Average and the TSX showing a slight gain. Trading volumes were light, likely due to the summer vacation period and a slowdown in quarterly earnings reporting. Midweek, healthcare shares received a boost from positive data on diabetes drugs’ effectiveness in treating obesity and related issues. On the other hand, information technology stocks underperformed due to worries about rising interest rates affecting future profits. Industrial stocks were also down due to concerns about a potential strike by the United Auto Workers Union. Financial stocks experienced a brief sell-off on Tuesday after Moody’s Investors Service downgraded the credit ratings of 10 smaller banks and placed six other entities on a downgrade watch. This decision was based on factors like funding costs and exposure to the troubled commercial real estate sector. However, financial sector shares showed some recovery as the week went on.

On Monday, the Federal Reserve released June’s latest consumer credit data. In June, consumer credit in the U.S. increased by $17.8 billion, showing a growth of 4.3% annually. The newest increase marked an increase from the previous month’s gain of $9.5 billion at a 2.3% rate. The rise was primarily driven by nonrevolving credit, including auto and student loans, which grew by 6% – a significant jump from the previous month’s 0.3% growth. However, revolving credit, like credit cards, decreased by 0.6% following an 8.1% gain in the prior month, marking the first decline since April 2021. Consumer borrowing is approaching $5 trillion, boosted by a strong labor market. Still, concerns exist about declining pandemic-induced savings and banks’ potential tightening of loan terms, who anticipate limited demand for new loans. The Federal Reserve’s data excludes mortgage loans – the largest category of household debt.1

On Tuesday, the National Federation of Independent Business reported that confidence among U.S. small-business owners increased slightly to 91.9 in July from 91.0 in June. However, this remains below the long-term average of 98 for the past 49 years. The survey shows that small businesses are still grappling with challenges from high inflation and a tight labor market. Despite a slowdown in price increases in June, inflation remains a significant concern for many small-business owners. The difficulty of filling job openings is also a prominent issue. The survey indicates that, while there’s a slight improvement in optimism for future business conditions, it’s still notably below historical averages. Many owners are eager to hire and benefit from consumer spending, but their confidence remains limited due to ongoing economic challenges.2

On Tuesday, the Philadelphia Fed President Patrick Harker has suggested in a speech, sponsored by the Philadelphia Business Journal, that the Federal Reserve reached a juncture where further interest rate hikes might not be necessary. President Harker mentioned that, unless new concerning data emerges before mid-September, it’s possible to exercise patience and keep rates stable, allowing the effects of previous monetary policy actions to unfold. Harker clarified that he isn’t considering rate cuts at this time. He emphasized that, if a decision is made to maintain steady rates, this stance might need to be maintained for an extended period. Harker expressed optimism about the economy, envisioning a more gradual and smooth economic trajectory than in the past. He predicted the economy’s growth rate would likely be slightly lower than 2.2% in the year’s first half. Harker is a voting member on the Fed’s interest-rate committee.3

On Thursday, initial unemployment claims for the week ending July 29 came in at 248,000 – an increase of 21,000 over the previous week. The four-week moving average was 231,000. Benefits paid for all programs for the week ending July 22 decreased by 8,484 to 1,852,152.4 The July U.S. Consumer Price Index (CPI-U) increased by 0.2%, matching the rise observed in June. Over the past 12 months, the overall index rose 3.2% before accounting for seasonal adjustments. The primary contributor to the monthly increase was the index for shelter, accounting for over 90% of the rise, along with motor vehicle insurance. The food index saw a 0.2% increase in July, following a 0.1% increase in the previous month. Within this, the index for food at home rose by 0.3%, while food away from home saw a 0.2% increase. The energy index experienced a 0.1% rise in July, with varying movements in its major components.

The core index  increased by 0.2% in July and June, excluding food and energy. Notable increases were observed in shelter, motor vehicle insurance, education and recreation, while decreases were in indexes like airline fares, used cars and trucks, medical care and communication. Over the last 12 months, the all-items (core) index rose by 3.2% – slightly higher than the 3% increase in the previous year ending in June. The index, excluding food and energy showed a 4.7% increase over the same period, while the energy index decreased by 12.5% , and the food index increased by 4.9% over the past year.5

On Friday, according to the U.S. Bureau of Labor Statistics, the July Producer Price Index (PPI) for final demand in the U.S. rose by 0.3% on a seasonally-adjusted basis. This follows no change in June and a 0.3% decrease in May. On an unadjusted basis, the final demand index increased by 0.8% over the 12 months leading up to July. The uptick in July’s final demand prices was mainly driven by a 0.5% increase in the index for final demand services. Prices for final-demand goods saw a slight rise of 0.1%. The index for final demand, excluding foods, energy and trade services, recorded a 0.2% increase in July, marking the largest rise since February’s 0.3% increase. Over the 12 months ending in July, prices for final demand, excluding foods, energy and trade services, grew by 2.7%.6

Price pressures have been decreasing more rapidly among producers compared to consumers. Economists closely monitor inflation data to determine if the Federal Reserve’s interest rate increase in July marked the end of the rate hike cycle. The recent Producer Price Index (PPI) exceeded expectations in July. Although no additional rate hikes are anticipated for the rest of the year, the possibility of another rate increase in 2023 remains if inflation continues to outperform projections, and economic conditions remain robust.

In the Coming Week

  • In Canada, domestic July CPI and July housing starts.
  • U.S. retail sales, housing starts and industrial production.
  • FOMC minutes of the July meeting.
  • U.S. leading economic indicators.








Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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