The Economic Road Ahead | September 16, 2022 | FFS

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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We saw another route last week as economic data strengthened. What does it mean for the road ahead?

Monday S&P 500 1.06% | NASDAQ 1.27%

Markets opened the week on a positive tone. The gains were led by tech stocks, which were following the lead of Asian and European markets overnight. Much of the rally on the day was based on a falling dollar.

Tuesday S&P 500 4.32% | NASDAQ 5.16%

Consumer Price Index (CPI) Data was released Tuesday morning and the headline reading fell to 8.3% from 8.5%. The underlying core data strengthened to 6.3% from 5.9%. This was an unexpected move as housing costs (which represent 40% of core CPI) firmed, pushing the number up. The markets sold off dramatically in response to the news. Firming core data would give the Federal Reserve Board (FRB) more reason to be aggressive on rates. This solidified a move of 0.75% and perhaps even 1.0% on September 22nd…

Wednesday S&P 500 0.30% | NASDAQ 0.70%

Markets ebbed and flowed throughout the day, trying to find direction after Tuesday’s selloff. They ended up closing up with a last 10-minute run up from being 0.5% down.

Thursday S&P 500 1.13% | NASDAQ 1.43%

Initial jobless claims continued to improve and retail sales advanced more than anticipated. This did not move the markets higher. Stronger retail sales signal more work for the FRB to erode demand. Lower unemployment signals more dollars in consumers pockets to spend. The FRB needs to see higher unemployment in their efforts to contain inflation…

Friday S&P 500 0.72% | NASDAQ 0.90%

Consumer sentiment is projected to rise to 59.5 for the month of September. While this is good news, it signals the potential of stronger consumer spending which causes further inflation. This factor pushed stocks further into the red for the week.

Conclusion S&P 500 4.77% | NASDAQ 5.48%

It was a rough week for markets although economically the data was showing strength. We need economic figures to start reflecting rate hikes implemented in order to see a slowdown in the FRB’s path. Looking ahead, this past Friday was a major options expiration date. When options expire, usually gains are to be had the following week as long positions are taken. This may be a short-lived bump, however, given the strong economic data.