- Last week, we got the final batch of macro data ahead of the Fed’s September meeting. In our view, the data confirmed that the Fed will not raise rates this week, but the November meeting remains a toss-up. We would lean towards the camp that the Fed will do one more +25 bps hike before year-end based on the current array of macro conditions. Whether or not we are right is less important, than how long the Fed may hold rates at an elevated level.
- On that front, we will get an update to the Fed’s Summary of Economic Projections (SEP), which may show that FOMC members are more focused on “higher for longer” even if there’s no further hikes in this cycle. Since the last SEP in June, incoming data has shown resilient economic growth even as inflation pressures continue to ease. However, core inflation metrics remain well above the Fed’s 2% target, and we believe the Fed will be reluctant to cut rates without a clearer line of sight to their target.
- August CPI. On a YoY basis, headline CPI was 3.7%, vs. estimate of 3.6% and prior of 3.2%. Core CPI was 4.3% YoY, in-line with the estimate, and down from 4.7% prior. On a MoM basis, headline CPI came in as estimated at 0.6%, up from 0.2%, while core rose slightly to 0.3% from 0.2%. The core MoM CPI is the most troubling, as it shows that the Fed is not yet on a sustainable path to its 2% target.
- PPI, which is generally seen as a leading indicator for CPI, also showed strength. PPI final demand YoY was 1.6%, versus the estimate of 1.3%, and prior of 0.8%. Excluding food and energy, PPI YoY was up 2.2%, as expected. On a MoM basis, PPI excluding food and energy came in at 0.2%, as expected.
- August Advance retail sales were up 0.6% MoM, higher than the estimate of 0.1% MoM, and up from the revised from 0.5% in July. Advance retail sales excluding Auto and Gas were up 0.2%, better than the estimate for down -0.1%, and compared to up 0.7% (revised) in July.
- Other data last week included August import price index (actual 0.5%, est. 0.3%, prior 0.4%), September Empire Manufacturing index (actual 1.0, est. -10.0, prior -19.0), August capacity utilization (actual 79.7%, est. 79.3%, prior 79.3%), and preliminary September U. Mich consumer sentiment and inflation expectations (long-term inflation expectations down to 2.7%, from 3.0% prior).
- Equities: Major equity indexes retreated for the second consecutive week as inflation figures came in hotter than expected. In earnings, both Adobe (ADBE) and Oracle (ORCL) disappointed with tepid results and modest outlooks helping accelerate the tech sector sell off. In corporate news, Apple (AAPL) launched new models of the iPhone and Apple Watch, MGM Resorts (MGM) issued warnings of significant negative cash flow impacts after its operations were significantly disrupted by a week-long cyber-attack, Charter Communications (CHTR) and Disney (DIS) reached a broadcasting rights agreement ending blackouts, 3M (MMM) pushed back the date of the spin-off of its healthcare division to mid-2024. General Motors (GM) revised its offer of wage increase to 20% from the previous 18% offer, but remained below the UAW’s 36% hike demand leading to targetd strikes. In IPO news, ARM Holdings (ARM) shares jumped 25% in its first trading day surpassing $70 billion Valuation, while InstaCart revised upwards its own IPO pricing range.
The Week Ahead
- The FOMC is on Wednesday. This meeting will be a hold, but markets will be looking for clues about whether there is one more hike likely in November. This FOMC is also accompanied by an update in the Summary of Economic Projections, or SEP, which contains the Fed’s estimate for future GDP, unemployment, and inflation.
- The SEP will be a crucial guide to how the Fed is thinking about the future path of macro conditions and rates, although history has shown that the Fed’s projections are seldom accurate.
- Equities: AutoZone (AZO), General Mills (GIS), FedEx (FDX) and Darden Restaurants (DRI) are set to report Q2 Results.
Market Summary – Returns and Yields
Definitions, sources, and disclaimers
Definitions:
- Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
- GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
- The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
- Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
- The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
- The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
- The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
- Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
- Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
- The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
- The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).
Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.
Important Disclosures:
The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.
Not FDIC Insured | Not Bank Guaranteed | May Lose Value | Not Insured By Governmental Agencies | Member FINRA/SIPC, Registered Investment Advisor
