It was another tough week for equities as the release of the July Fed meeting minutes strained the market. On the fixed income side, rates continued to push higher as the yield on 10-year U.S. Treasury notes hit their highest level since 2008, and 30-year mortgage rates moved to their highest level in over 20 years. Seeing the market react to three-week-old news that had nothing revelatory is always intriguing. And given that there was no new information, it more likely shows that market participants were ready for a little breather after the strong performance in the first seven months of the year.
Even though the FOMC positioning revealed in the minutes has been expressed before, they continue to lay the groundwork for the possibility of additional rate hikes. The minutes stated, “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.” In addition, FOMC members “stressed that inflation remained unacceptably high and that further evidence would be required for them to be confident that inflation was clearly on a path toward” target. And while the greatest odds show the end of the rate hiking cycle is upon us, there is now about a 1/3 chance being given to one final increase. Regardless, the point getting overlooked in all of this ‘will they or won’t they’ talk is that we are nearing the end of the rate hike cycle, and that’s a positive development.
On the flip side of the coin, FOMC members noted a “number of tentative signs that inflation pressures could be abating.” They specifically noted softer core CPI, lower online prices, smaller price hikes from firms, less shelter inflation, and declining short-term inflation expectations. However, they said there were still “upside risks to inflation” and that the next few months of data would be critical in clarifying how robust the disinflation process is. I wonder if the Fed truly believes what they are saying or is trying to tamp down inflation expectations, which, if left uncontrolled, can lead to actual inflation.
Understanding the true motive of the Fed is fascinating, as we live in a world with almost limitless access to information. However, we assess inflation data only once monthly, nearly two weeks after the last day of the prior period when the Bureau of Labor & Statistics (BLS) releases its report. Last week we discussed how slowly CPI’s shelter component moves, but in reality, the whole measure moves pretty slowly. And not surprisingly, people/companies are working to address this vast data lag. Truflation, a relatively new economic/financial data provider, has been putting out its own measure of inflation for a few years now. Interestingly, they are utilizing 30+ data providers and consuming over 10 million data points to produce a high-frequency inflation measure that is updated daily. And over the last few years, this measure has been a solid indicator of the direction of underlying inflation and where the official measure of CPI will move.
And what is the Truflation number pointing to today? The good news is that it has dropped from over 10% a year ago to 2.5% today. We can only hope this continues to indicate where the official CPI numbers are moving, and soon, before the Fed over-tightens.
Economy
- U.S. equity markets marched lower again this week, with the S&P 500 down -2.1%, the Nasdaq down -2.6%, and the small-cap Russell 2000 down -3.4%. Rates moved higher, and equities were lower as Fed minutes highlighted the potential for additional rate hikes.
- U.S. retail sales were up 0.7% MoM in July, marking a fourth consecutive increase and beating market forecasts of 0.4%. It followed an upwardly revised 0.3% gain in June; another sign consumer spending remains strong despite high prices and borrowing costs.
- The N.Y. Empire State Manufacturing Index sank to -19 in August from 1.1 in July, well below market forecasts of -1, pointing to the first decline in manufacturing activity in the N.Y. state in three months.
- Building permits in the United States edged 0.1% higher to a seasonally adjusted annual rate of 1.44MM in July, missing market estimates of 1.46MM permits.
Stocks
- U.S. equities were in negative territory. Consumer Discretionary and Real Estate led the decline, while Technology and Energy outperformed. Growth stocks led value 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 increased 8 basis points to 4.25% during the week.
- Global bond markets were in negative territory this week.
- Government bonds led for the week, followed by corporate bonds and high-yield bonds.
