Weekly Market Commentary September 9th to September 13th 2024

Inflation data mostly met market expectations, with headline CPI coming in at 2.5% year-over-year and 0.2% month-over-month, and core CPI coming in at 3.2% and 0.3%, respectively. A rise in shelter and transportation costs was offset by declines in food, energy, and automobiles. Given the declines in food and energy, it’s no surprise that core CPI remains stuck over 3%, as it does not include the changes in those costs. However, the progress made with headline CPI is encouraging. In just two months, the Consumer Price Index fell from 3% to 2.5%, getting very close to the preferred 2% target.

The Producer Price Index (PPI) rose slightly higher than estimates on the month but met expectations on the year. August PPI month-over-month increased 0.2%, with PPI ex food and energy increasing 0.3%. On a yearly basis, August PPI increased 1.7% and 2.4%, respectively. PPI inflation has been largely range-bound and is no longer showing meaningful signs of declining. However, the range is similar to that of 2018 and 2019, meaning it appears mostly tamed.

The inflation reports were received positively, which bodes well for next week’s FOMC meeting where the Federal Reserve will decide on interest rate policy. The market expectation is a rate cut of 25bps, although there is a near 50% expected chance of a 50bp cut. The bottom line is we are about to enter a rate cutting cycle. In regard to the Fed’s soft-landing scenario, this is where the rubber meets the road. In the beginning, the Fed had to increase interest rates to combat inflation at the risk of pressuring the consumer and hurting the economy. With inflation effectively under control and no major cracks in the economy, phase one appears to be a success. In phase two, the Fed will begin to ease rates, taking pressure off the consumer at the risk of reigniting inflation. If inflation remains tame and the economy improves from lower rates, the optimal soft landing will be achieved.

Equity markets gained back almost all the losses from last week as the S&P 500 sits less than 1% away from all time highs. The S&P 500 rallied 4.02% to 5,626, the Nasdaq rallied 5.95% to 17,684, and the Dow Jones rallied 2.60% to 41,393. Conversely, U.S. Treasury yields fell on the week with the 2-Year falling 6bps to 3.58% and the 10-Year falling 5bps to 3.65%, a positive 7bp spread.

Next week, all eyes will be on the previously mentioned FOMC rate decision occurring on Wednesday. We will also get retail sales and housing data.