Blip on the Radar? | September 17, 2021 | 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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Markets continued to see turbulence last week. Is there something to it, or a blip on the radar?

Monday

The week opened on a positive note as the S&P 500 shrugged off the prior week’s losses and gained 0.25% on the day. The advance was spear headed by an advance in commodity prices. This follows recent hurricane activity in the southeast.

Tuesday

Markets resumed the recent trend of falling. The S&P 500 shed 0.6% on the day, while bonds saw a safe haven bid. Core Consumer Price Index (CPI) rose by 4.0% YoY (Aug), slower than the 4.2% expected. Slowing inflationary pressure could be attributed to failing consumer sentiment but could also be easing supply side constraints.

Wednesday

The seesaw continued as markets rose sharply on Wednesday. Sharpley is relative, as the rise was 0.9%; as of late changes in value of more than 0.5% have become sharp moves. VIX is supposed to be forward looking volatility for the next month. When VIX is at 20 (currently) that would imply an expectation that moves will be less than 1%/day.

Thursday

Retail sales unexpectedly jumped, which caused a down day for equities. This is a continuation of the good news is bad news that has been occurring as of late. Unemployment data was also released on Thursday showing that initial jobless claims increased from 312K to 332K. This was largely expected with regional hurricane activity tamping down job activity. So, it carried little impact on market activity.

Friday

The week ended with a stumble as all, but one major index (including bond indices) fell on the day. Consumer sentiment remained a tepid 71.0 in September. For frame of reference the lowest level during 2020 was 71.8 in April. The concern is that a weak consumer will lead to a weak economy as consumption makes up approximately 70% of economic activity.

Conclusion

It was a week to forget for markets as the S&P 500 fell for the second week. While the weekly loss was only a little more than a half percent, the fall from the peak is now about 2.5%. A true correction would be a 10% fall, which is still a long way off. Looming ahead, however, is a debt ceiling fight, variant news (always), the rest of hurricane season, consumption concerns, and a Federal Reserve Board (FRB) meeting this week. Nothing to see here…