The market responded to the inflation data released on Tuesday, with the core rate of inflation (the Fed’s preferred measurement) increasing by 0.6% when the consensus view was for a slight decline. The S&P Index hit the lowest point intra-day since mid-July and fell the most in one week since mid-June. Growth stocks continued to be hammered, falling over 5% in the week. Technology and communication services led to a drop in the S&P 500. The commodity-heavy TSX index held up better, losing only 2.70% in the week. Oil fell 2.56% in the week on fears of inflation and demand reduction in a slowing economy.
On Tuesday, the CPI data surprised to the upside, with the core rate increasing by 0.6% to 6.3% compared to the consensus estimates of 6.1%. The headline inflation rose slightly by a modest 0.1% to 8.3%. While gasoline decreased 10.6% in the month, the increases in the prices for shelter, food and medical more than offset the decline in gas. The energy index fell 5% in the month, with electricity and natural gas components rising, offsetting the gasoline decline. The food index rose 0.8%, while the at-home food index rose 0.7%.1
According to the US Bureau of Labor Statistics on Wednesday, the Producer Price index for final demand fell 0.1% in August, following a 0.4% decline in July. The demand for goods declined by 1.2% compared to the 0.4% increase for services. Prices for final demand less food and energy rose 0.2%. A 6% drop in prices for final demand for energy was the primary contributor to the overall decrease in the month.2
On Thursday, another indicator that the labor market is remaining strong, the weekly unemployment claims for the week ending September 10, was 213,000, a decrease of 5,000 from the previous week. Continuing claims for all programs also fell, decreasing from 23,420 in the prior week to 1,391,432.3 The Fed is closely watching the labor market and wage growth for any signs of weakness, permitting the slowing of rate hikes. To date, the labor market has remained robust. Also, on Thursday, retail sales showed improvement, rebounding 0.3% in August as gas prices fell as Americans increased their purchase of cars, dined out more, and shopped for back to school. The report revised the July retail sales showing a decrease of 0.4%. Economists were disappointed that the August reading did not cover the adjusted July number.4
Additionally, the Philadelphia Fed Manufacturing Index moved into negative territory with readings of -9.9 from 6.2 in August. New orders remained negative, and the shipments index fell but remained positive.5 The Empire State Manufacturing Survey improved but remains negative with a reading of -1.5. New orders pushed higher, and shipments jumped. Both manufacturing indices reported increased employment.6
On Wednesday of this week, the US Fed will meet to set interest rates, and many investors expect a 75-basis point increase.7 However, with the recent disappointing core and headline CPI reports, there is talk the Fed could be more aggressive and increase rates by 100 basis points. There is no indication from the data supporting a change in Fed policy aggressiveness or a pause. Based on the recent market reaction over the last couple of weeks to the data showing persistent inflation coupled with a strong labor market, we believe there is a strong likelihood the market may continue to retrace gains earlier this summer.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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