Oct 17, 2022

Stubbornly High Inflation

Weekly Market Commentary

The release of the September Consumer Price Index (CPI) offered more sobering news, as inflation continues to run hot. The U.S. Bureau of Labor Statistics (BLS) reported the CPI for September rose 0.4% versus August. The core CPI, which excludes food and energy, rose 0.6%

Economists had forecast a 0.3% and 0.4% increase, respectively, according to DJ Newswires.

Food and energy are important components of the cost of living. Recently, gasoline prices have fallen, but CPI data continue to reflect sharp gains for food.

If we strip out food and energy, the core rate of inflation has been steady over the last 12 months—no signs of a peak, just a long plateau.

The Fed is letting bonds bought in the pandemic run off its balance sheet, while the disappointing CPI almost guarantees another 75-basis point (bp, 1 bp = 0.01%) rate hike at the Fed’s November 2 meeting, unless the sharp rate hikes spark unwanted financial instability.

We haven’t seen that at home, but the U.K. has recently experienced financial turbulence.

Low U.K. government bond yields during the 2010s encouraged U.K. pension funds to adopt more aggressive strategies to boost returns.

But as yields have risen this year and bond prices have fallen (bonds and yields move in opposite direction), the value of these complex strategies fell, forcing pension funds to sell government bonds to raise cash.

Forced selling pushed bond prices even lower, forcing additional sales—a so-called doom loop—until the Bank of England intervened to buy government bonds.

It’s hard to know what might be lurking under the surface, but it’s unlikely we are in immediate danger of something ‘breaking’ in the U.S., which could force a U-turn in Fed policy.

Fed officials have signaled they will eventually slow the pace of increases and assess the effects of current policy on the economy and inflation. For now, the Fed continues to take a hardline on inflation, as it plays catch up after failing to raise rates last year.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Adviser and Valmark Advisers, Inc. a SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc., Member FINRA/SIPC. 130 Springside Drive, Suite 300, Akron, OH 44333-2431 800.765.5201 Prosperity Partners and FDP Wealth Management, LLC are separate entities from ValMark Securities, Inc. and Valmark Advisers, Inc. Prosperity Partners, FDP Wealth Management, LLC, ValMark Securities, Inc., Valmark Advisers Inc., and their representatives do not offer tax advice. You should consult your tax professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.

Indices are unmanaged and do not incur fees, one cannot directly invest in an index. You should consult your tax professional regarding your individual circumstances. This information is provided by Financial Jumble, LLC. Financial Jumble, LLC is a separate entity from ValMark Securities, Inc. and ValMark Advisers, Inc.

RELATED POSTS

Data Disconnect

Retailers are ringing up solid earnings, but consumer confidence surveys tell a different story, suggesting the mood is far from upbeat. This disconnect raises a big question: if shoppers are still buying, as we will highlight in a moment, why do they feel so uneasy about the economy?

Buyer’s Market – With Strings Attached

Redfin reported last week that sellers are grappling with the strongest buyer’s market since the real estate brokerage firm began compiling records back in 2013. Sellers now outnumber buyers by 37%.

Investors Unfazed by Shutdown

The government shutdown lasted from October 1 to November 12. It was the longest on record. During that period, the S&P 500 rose from 6,688.46 (September 30) to 6,850.92 (November 12), or an advance of 2.4%. As we’ve noted in prior shutdowns, investors typically ignore political drama.

The Job Market’s Missing Pulse

The government shutdown has been and will always be prominently featured in the 24-hour news cycle. Travelers are feeling it, furloughed federal employees wonder when they will receive their next paycheck, and even the housing market is affected as some buyers are left in limbo.

One Cut, Two Cut: The Fed’s Delicate Balancing Act

The Federal Reserve delivered a widely expected 25-basis-point rate cut (bp, 1 bp = 0.01%), but Fed Chief Jay Powell tempered market enthusiasm by signaling that a December cut is far from certain.