It would be impossible to write an article this week without discussing the horrific terrorist attacks suffered by Israel last weekend and the ongoing pain and destruction that is likely in the coming weeks. First and foremost, our thoughts and prayers are with all the families impacted by this unconscionable terrorist violence, and we hope that this is the last time anyone has to endure something so grotesque. The stories and images are genuinely heartbreaking, and they bring everything into perspective very quickly.
The tragedy leaves a somber backdrop as we delve into the week’s economic news. Admittedly, the juxtaposition of such dire humanitarian crises against financial metrics is stark. Unfortunately, we must discuss the week’s economic developments within this sobering reality.
The week’s most significant economic news was the September CPI report released on Thursday. It was largely in line with consensus expectations, with headline CPI coming in 0.1% higher than expected MoM (0.4%) and YoY (3.7%). Core inflation was right on target, up 0.3% MoM and 4.1% YoY, with the YoY number showing the lowest reading in two years. Even with the news, the markets moved lower as many pundits claimed the numbers were “hotter” than the Fed would want to see. As we’ve discussed many times before, this could mean additional rate hikes.
While the loudest reaction to the news was negative, looking beyond the topline numbers does provide some encouraging information. One of the best pieces of news was on food inflation, where prices of “Food at home” (i.e., grocery stores) were only up 2.4% YoY, the lowest reading since June 2021. Moreover, shelter continues to be the primary driver of headline and core inflation, contributing 60%+ and 70%+ respectively of the YoY inflation numbers. Why is this important? Because as we’ve discussed, shelter is one of the most lagged pieces of CPI data. Real-time data shows that rent inflation has decreased significantly and is actually negative. This means the inflation picture should look much better (all else equal) as we move forward and the current numbers flow through to CPI.
Economy
- It was another mixed week for equity markets, with the S&P 500 up 0.4%, the Nasdaq down -0.2%, and the small-cap Russell 2000 down -1.5%. Thursday’s inflation data seemed to spook the market after a strong start to the week.
- Producer prices in the U.S. rose 0.5% MoM in September, the least in three months, following a 0.7% rise in August, but above market forecasts of 0.3%. Goods prices were up 0.9%, prompted by a 5.4% surge in gasoline cost.
- The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) in the U.S. jumped by 14 BPS to 7.67% in the first week of October. It marks a fifth consecutive week of rising interest rates and a fresh high since November 2000.
- The University of Michigan consumer sentiment for the U.S. fell to 63 in October from 68.1 in September, the lowest in five months, and missing market estimates of 67.2, preliminary estimates showed.
- The study also showed that year-ahead inflation expectations rose to 3.8% from 3.2% in the earlier month, the highest since May 2023, and the five-year outlook increased to 3% from 2.8%.
Stocks
- U.S. equities were in positive territory. Energy and Utilities were the top performers, while Consumer Discretionary and Materials lagged. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 15 basis points to 4.63% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
