Weekly Market Update: September 25, 2023
Inflation remains sticky. After trending lower over the late spring and early summer months, both the Consumer and Producer Price Indexes came in stronger than expected in August. Likewise, core consumer and producer (wholesale) prices, which exclude the volatile energy and food components, moved in the wrong direction for what is expected to be a Federal Reserve that is data-driven in formulating monetary policy.
The central bank may keep the benchmark short-term interest rate higher for an extended period to effectively fight inflation. The Federal Open Market Committee (FOMC), which was to make its September monetary policy decision shortly after we went to press, was expected to keep the federal funds rate steady at 5.25%-5.50%, but the possibility of another quarter-point hike this year remains on the table. The Fed was more hawkish this past summer, which put upward pressure on Treasury yields.
Rising oil prices bear watching. Although the central bank typically doesn’t base its monetary policy decisions on the energy market, higher crude quotations will make it more expensive for manufacturers to produce goods. These resultant elevated operating costs will probably be passed through to consumers in the form of higher prices, which will likely keep inflation above the Fed’s comfort level. This situation may be exacerbated in the auto sector, given the likely impact of the United Auto Workers’ strike on production and ultimately supply.
Consumers remain cognizant of the inflation situation, and this is starting to have a greater impact on how they spend their money. According to the University of Michigan, consumer sentiment fell for the second-consecutive month, to 67.7, in August, a level well below the historical average of 86. This may get worse, given the aforementioned higher energy prices ahead of the upcoming peak heating season. The current consensus is that the consumer will be more cautious this holiday shopping season, with higher prices for essential items causing shoppers to cut back on discretionary spending. This also comes as savings accounts shrink and nationwide credit card balances balloon.
Conclusion: We think this is the time to exercise some caution. Volatility has picked up, as the market is dealing with several headwinds during a traditionally tough period for equities.