In the Coming Week:
- Housing starts and existing home sales
- U.S. Fed interest rate decision and news conference
- S&P Flash U.S. services and manufacturing PMO
- Consumer Price Index and Core CPI
- Producer Price Index and Core PPI
- U.S. Retail Sales
- Industrial production and Capacity Utilization
North American equity indexes showed mixed performance, with value stocks leading the way, especially as U.S. West Texas Intermediate (WTI) oil prices surged above $90 per barrel for the first time since November 2022. Large-cap stocks outperformed their smaller counterparts, and Canada’s TSX performed well due to a 4% surge in oil prices during the week.
In Europe, the Pan-European STOXX Europe 600 Index ended 1.60% higher. The European Central Bank (ECB) raised interest rates but indicated that borrowing costs might have peaked, contributing to positive investor sentiment. Additionally, improved economic data from China boosted confidence. Germany’s DAX increased by 0.94%, France’s CAC 40 gained 1.91% and Italy’s FTSE MIB rose by 2.35%. The U.K.’s FTSE 100 climbed 3.12%, partly attributed to the weakening of the U.K. pound against the U.S. dollar, which benefits the index by supporting multinational companies with substantial overseas revenue.
On Wednesday, the Bureau of Labor and Statistics reported that, in August, U.S. consumer prices experienced a significant increase of 0.6%, primarily driven by surging oil prices. This marked the largest jump in 14 months. However, core inflation rose by a more modest 0.3% during the same period when excluding the volatile energy and food sectors, slightly surpassing expectations and creating a negative sentiment in financial markets. This core rate had shown a slower increase of 0.2% in the preceding two months. Yearly inflation accelerated to 3.7% from 3.2% in July, rebounding from a 27-month low of 3% in June. In contrast, the annual core inflation rate decelerated to 4.3% from 4.7%, reaching its lowest level in 22 months. The Federal Reserve considers the core rate a better predictor of future inflation trends due to the volatility of energy and food prices. Despite these inflation fluctuations, the Federal Reserve is expected to maintain its key interest rate during its upcoming meeting, as it believes inflation will continue to slow toward its 2% target. The Central Bank has increased its benchmark rate significantly over the past year and a half to curb inflation and stabilize the economy. Critical factors in the August inflation report include a significant 11% increase in gasoline prices, contributing to more than half of the overall CPI increase, while food prices rose by a mild 0.2%.1 Shelter costs, the largest household expense, increased by 0.3%, with rents seeing a sharper 0.5% rise. The Fed anticipates that shelter prices will gradually ease, aiding in lowering the inflation rate. In summary, while inflation remains above the Fed’s 2% target, the direction of inflation is more favorable, which may lead to the Fed keeping interest rates stable. However, any adverse changes in shelter and labor costs could influence the Fed’s decisions in the future.
On Thursday, the U.S. Labor Department released the initial jobless claims for the week ending September 9. During the most recent week, initial jobless benefit claims in the United States continued to maintain exceptionally low levels. The 4-week moving average reached its lowest point since February, even as unemployment benefit claims saw a slight increase of 3,000, bringing the total to 220,000, a figure that still closely mirrors the lows observed in February. For the week ending August 26, the total number of weeks claimed for benefits across all programs in the U.S. stood at 1,772,148. This figure represented a decrease of 42,569 compared to the previous week. In the same week in 2022, there were 1,389,366 weekly claims filed for benefits in all programs, highlighting an increase in claims over the year.2 Overall, while there are indications that hiring might be slowing down slightly, the data suggests that very few workers are being laid off. Federal Reserve officials are monitoring these trends closely as they seek a balance between economic softening and labor market conditions to manage inflation effectively.
The U.S. Bureau of Labor Statistics reported that, in August, the Producer Price Index (PPI) for final demand in the U.S. increased by 0.7%, marking a notable uptick from the 0.4% rise observed in July. This increase represents the largest monthly rise in final demand prices since June 2022, which increased by 0.9%. On a 12-month basis, the PPI for final demand climbed by 1.6% through August. The increase in final demand prices for August was primarily driven by a 2.0% surge in the index for final demand goods, accounting for 80% of the overall rise. In contrast, prices for final demand services advanced by a more modest 0.2%. Excluding the volatile categories of food, energy and trade services, the index for final demand still increased by 0.3%, mirroring the rise in July. Over the 12 months ending in August, this core measure of final demand prices rose by 3.0%, marking its largest increase since April. Breaking down final demand goods, the index surged by 2.0% in August, primarily due to a substantial 10.5% increase in energy prices, especially gasoline. Meanwhile, the final demand for goods, excluding food and energy, increased by 0.1%. Conversely, final demand for foods declined by 0.5%, with notable price fluctuations for vegetable items. Regarding final demand services, they rose by 0.2% in August, with services excluding trade, transportation and warehousing increasing by 0.3%. However, margins for trade services saw a 0.3% decline, while transportation and warehousing services experienced a substantial 1.4% increase.3 Wholesale prices, which had come close to turning negative earlier in the summer, have gradually increased in recent months. However, these increases are no longer indicative of rapid price rises. Instead, current inflation data suggests a more moderate trend. This trend of milder inflation readings is anticipated to influence the Federal Reserve’s decision at their meeting this week, likely leading them to keep interest rates unchanged. Senior Fed officials believe that inflation will continue to slow down sporadically, and there’s even optimism that the U.S. might avoid the long-anticipated recession. Nevertheless, the latest reports on the Consumer Price Index (CPI) and Producer Price Index (PPI) indicate that the battle against inflation is ongoing and uncertain.
U.S. retail sales increased by 0.6% in August, exceeding expectations, despite a slowdown in internet store sales following Amazon Prime Day. Higher gasoline prices primarily drove this growth. Analysts had predicted only a 0.1% increase for the month, especially after a strong July when Amazon had its record-breaking sales day, and other retailers also performed well. Retail sales, which serve as an economic indicator, comprise approximately one-third of all consumer spending and have been surprisingly robust this year. However, factors like rising interest rates, a hiring slowdown and the resumption of student loan payments for many Americans are expected to dampen consumer spending in the coming months. Forecasters anticipate the upcoming holiday shopping season to be the weakest in five years. Sales at internet retailers remained flat in August after a substantial 1.5% increase in July, with consumers pulling back after the Prime Day shopping spree. Gasoline station sales surged by 5.2%, contributing to the overall increase, although this can strain household budgets. Auto sales also rose by 0.3%, accounting for about 20% of all retail sales. Retail sales increased by a modest 0.2%, excluding auto dealers and gas stations, providing a better gauge of consumer demand. Most other retailers saw slight increases in sales, with home furnishings stores being an exception. In summary, the U.S. economy experienced a summer boost, but the impact of higher interest rates is expected to slow this momentum. Nonetheless, little evidence suggests an impending recession, as low unemployment and rising wages continue to support consumer spending.4
On Friday, the Federal Reserve reported August industrial production increased by 0.4%, with manufacturing output showing a more modest rise of 0.1%. The growth in manufacturing was hindered by a notable 5% decline in the production of motor vehicles and parts, while output in other factory sectors increased by 0.6%. The mining sector saw a significant increase of 1.4% in its production, and utilities also experienced growth, with a 0.9% climb. Compared to last year’s period, total industrial production in August was 0.2% higher, reaching 103.5% of its 2017 average. Capacity utilization, a measure of how efficiently resources are being used, increased to 79.7% in August, aligning with its long-run average from 1972 to 2022. This data suggests a moderate expansion in industrial production and capacity utilization, with fluctuations in specific sectors like motor vehicles impacting the overall numbers.5
Also on Friday, the New York Fed reported the Empire State Business Conditions Index, which measures manufacturing activity in the state, surged by 21 points to reach 1.9, defying expectations of a negative reading of -10. This reversal follows a significant 20.1-point drop in August. A reading above zero signifies improving conditions. Key details show new orders rising by 25 points to 5.1, shipments increasing by 24.7 points to 12.4 and expectations for business conditions six months ahead hitting their highest level in more than a year. Despite recent volatility, this data provides early insights into the nation’s factory conditions.6
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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