September 17, 2022

Weekly Market Commentary September 12th to September 16th 2022

The hotly anticipated monthly release of the Consumer Price Index showed a 0.1% increase in prices, which was worse than the 0.1% decline analysts expected. Prices are now up 8.3% annually, or 6.3% when stripping out volatile food and energy costs. Inflation remains broad-based. Among the categories showing troubling monthly price increases were new vehicles (+0.8%) and rent (+0.7%.) The 10.6% monthly decline in gasoline prices was not enough to send inflation lower.

The Producer Price Index gauge declined 0.1% from last month and is 8.7% higher than a year ago. The decline in PPI coupled with the slight increase in CPI shows that companies are beginning to raise prices above the rate of their input cost inflation, in order to maintain profit margins.

Retail Sales grew 0.3% monthly, beating expectations for a 0.1% decline. However, the growth was solely powered by stronger auto sales, as Retail Sales Ex-Autos declined 0.3%. It seems that increased semiconductor availability is beginning to boost auto supply. The portion of this report that affects GDP, known as the Control Group, showed no growth.

Several economic surveys were also released this week. The NFIB’s Small Business Optimism survey showed a slightly brighter outlook than the month prior, due to receding inflation worries. Regional manufacturing surveys out of New York and Philadelphia showed declining activity, although that came with reduced price pressures. University of Michigan’s Consumer Sentiment survey rose from 58.2 to 59.5 on the back of lower gas prices. Consumers’ expectations for future inflation levels continue to subside.

Meanwhile, Initial Jobless Claims continue to trend in the right direction. They came in at 213,000, better than economists’ prediction of 226,000. Last week’s figure was also revised downward to 218,000.

Finally, Mortgage Applications fell 1.2% this week, marking the fifth straight weekly decline. As interest rates continue to rise, expect pressure on housing activity. Refinancing volume dropped another 4.2% this week and is now off 83% from a year ago.

Due to the hotter-than-expected CPI report, equities sold off sharply. The S&P 500 wound up down 4.8% to 3,873, while the Dow Jones Industrial Average dropped 4.1% to finish at 30,822. The yield on the 10-Year U.S. Treasury jumped from 3.33% to 3.45%, while the 2-Year yield soared 31 bps to 3.87%. Expectations for heightened Federal Reserve interest rate hikes to combat inflation were the main driver behind the spike.

All eyes will be on the Federal Reserve’s meeting next week, where they are expected to raise the benchmark Fed Funds interest rate sharply. Elsewhere, we will see a slew of housing data including Building Permits and Existing Home Sales.

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