Weekly Market Commentary November 8th to November 12th 2021
Inflation continues to be THE major story in the economy right now as, while the Fed continues a “Remain calm…all is well” approach, things appear to be getting worse. They have announced their plan to begin the tapering of their bond-buying program – the first sign of a shift from quantitative easing to tightening, but what about interest rates? The Fed continues to hold fast to their theory that the current inflation environment is still ‘transitory’ and that they would like to see improvement in the employment situation before they begin to raise rates. It seems to be getting more difficult by the week for the investors to stay in lockstep with the Fed as supply chain bottlenecks, labor shortages, and consumer-driven shifts from service spending to goods spending continues to keep inflation elevated. This in turn is causing anxiety in everything from consumer sentiment to investing and financial markets to political posturing.
On Tuesday, producer prices for October matched expectations and came in higher than September. The year-over-year figure of +8.6% was the largest increase since 2010 and is the direct result of the continued high costs to produce goods. On the consumer side, Wednesday brought us an even bigger surprise. The month over month increase in consumer prices for October came in at +0.9% when consensus called for +0.6%. And the year-over-year figure was +6.2% which was the biggest surge in 30 years, led by energy, rents, and vehicle costs. Both producer and consumer prices have trended lower in the past few months which has supported the Fed’s transitory remarks, but October has turned the tables.
Speaking of consumers, evidence of their concern showed up in the University of Michigan Consumer Confidence Index. The survey came in at 66.8 when expectations called for 72.5. Blame lies squarely on the elevated prices consumers are seeing across the board, and growing concern that Washington policy makers aren’t doing enough to dampen them. Consumers have been flush with stimulus cash for the past year boosting demand for goods which they are having trouble finding on store shelves. Combined with the pandemic-driven shift away from services in the past 18 months, inflation will likely be a hot topic for the next six to nine months. Will the employment-centered Fed stay the course and keep rates low? Or will they strike more of a balance between employment and inflation and change their course and boost short term rates sooner? The Fed has been very clear in its communication so far this year and we hope to get more insight prior to year-end.
In the markets, despite a strong finish to the week, equities ended down slightly across the board. The S&P 500 closed at 4,683 (-0.3%), the Dow Jones Industrials closed at 36,100 (-0.6%), and the NASDAQ finished off -0.7% at 15,861. Yields were up as bond values dropped across the curve. The 2-year US Treasury finished at 0.52%, the 10-year at 1.57%, and the 30-year at 1.95%.
Next week, look for Retail Sales, Industrial Production and Capacity Utilization, Building Permits and Housing Starts, and Weekly Jobless Claims.