Weekly Market Update – September 15, 2023

Quick Takes

• U.S. stocks and bonds dipped lower again as oil prices, Treasury yields, and the U.S. Dollar continue to climb higher. The S&P 500 Index, Nasdaq Composite Index, and Russell 2000 Index all ended the week with slim declines of -0.2 to -0.4%. 
• The U.S. dollar index reached its highest level since March, but non-U.S. stocks were still able to advance, with developed market international stocks (as measured by the MSCI EAFE Index) rising +1.7% and the MSCI Emerging Markets Index moving up +1.1%.
• Reports on consumer (CPI) and wholesale (PPI) inflation showed that the Federal Reserve may be making progress in its fight against inflation, with relatively mild increases in August outside of higher oil and energy prices.

Stocks give up the week’s gains on Friday, post slim losses

The major U.S. stock indices were on pace for a positive weekly close after Thursday’s session, but that all turned around on Friday. The S&P 500 Index, Nasdaq Composite Index, and Russell 2000 Index all dropped more than -1% on Friday to end the week with slim declines. The S&P and Russell slipped -0.2%, while the Nasdaq dipped -0.4%. It is difficult to point to any particular catalyst for the turn lower on Friday, especially with it being a so-called “Triple-Witching” day, in which three major categories of option and futures contracts expired and resulted in trading volume that spiked to nearly twice the daily average. 

Much of last week’s news, economic data and Federal Reserve comments appeared to support the market’s expectation for a soft-landing and another rate pause with the Fed funds target rate range remaining at 5.25%-5.5% at this week’s Federal Open Market Committee meeting. That kicks off on Tuesday and concludes with the rate decision and press conferences on Wednesday afternoon. As for economic data, the latest Consumer Sentiment report wasn’t confidence-inspiring with the preliminary reading by the University of Michigan’s coming in weaker than expected in early September, but Industrial Production and Capacity Utilization both topped expectations. Earlier in the week, reports on consumer (CPI) and wholesale (PPI) inflation showed mild increases outside of higher gasoline and energy prices. Retail Sales for August were healthy, coming in much higher than expectations. The United Autoworkers (UAW) union contract with Detroit’s Big Three automakers expired at midnight Thursday, precipitating the first-ever UAW strike against the three companies. Workers walked out of a few plants on Friday as the strike began. It’s the first time in the union’s 88-year history that all three major automakers were targeted simultaneously. Oil prices might also be weighing on stocks, as West Texas International (WTI) crude hit a price of $91.15, the highest since November 8, 2022.

Overseas equities, which didn’t have the direct impact of the triple-witching trading and UAW strike, held onto their gains for the week. Developed market international stocks (as measured by the MSCI EAFE Index) rose +1.7% and the MSCI Emerging Markets Index was up +1.1%. Those gains came despite the U.S. Dollar Index inching up another +0.2% over the week, its ninth consecutive positive week and at the highest level since March. The 9-week win streak is the longest since October 3, 2014, when the Dollar Index had a 12-week win streak, which is the longest winning streak on record.

Meanwhile, rising Treasury yields continue to weigh on bond investors, with the yield on 10-year U.S. Treasury note reaching 4.33%, and the 2-year U.S. Treasury yield crossing back above the 5% to close at 5.03%. As a result, fixed-income benchmarks fell for the second week in a row, with the Bloomberg U.S. Aggregate Bond Index and non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) falling -0.3%.

Chart of the Week

Inflation posted its biggest monthly increase this year in August as consumers faced higher prices on energy, food, and shelter. The headline Consumer Price Index (CPI) rose +0.6% in the month of August, up from last month’s unrevised +0.2% and in line with expectations. That’s the largest monthly increase in 14 months, driven by higher oil prices. On a year-over-year (YoY) basis, headline CPI rose +3.7%, a tick higher than expectations of +3.6% and compared to +3.2% in July and a 27-month low of +3% in June. The annual headline inflation reading has eased from a peak of +9.1% in June 2022. Core CPI, which excludes the more volatile food and energy prices, was up +0.3% for the month, a bit higher than expectations and July’s reading which were both +0.2%. Core CPI was up +4.3% YoY, also in line with expectations and down from the prior month’s +4.7% annual rate. The Federal Reserve (Fed) views the core rate as a better predictor of future inflation trends since energy and food prices tend to jump up and down, and the +4.3% YoY Core CPI rate is the lowest in 22 months. Still, it remains more than double the Fed’s 2% target.  More than half of the increase in CPI was due to the +10.6% surge in gasoline prices in August. Food prices were up a more modest +0.2% last month, while shelter costs — the biggest expense for most families — was up a relatively mild +0.3% in August, although rents rose a sharper +0.5%. Airline fares climbed nearly +5% after four straight declines and may stay elevated if oil prices don’t come down. The cost of auto insurance, new cars and trucks, and home furnishings also rose in August but used vehicles dropped again, and hotel rates declined for a third consecutive month. All considered, the consensus is that the August inflation data is enough to keep the Fed from hiking rates further on September 20. 

Headline Inflation Reaccelerates, but Core Moderates

U.S. Consumer Price Index (CPI) Year-over-Year percent change

Data as Of Sept 13, 2023.
Source: Bureau of Labor Statistics, CNBC.

Economic Review

• August wholesale inflation was hotter than expected, but core prices were in check. The Producer Price Index (PPI) accelerated more in August, rising +0.7%, the biggest monthly gain since June 2022 and above expectations of +0.4%. That compares to the prior month’s positively revised +0.4% (up from +0.3%). Year-over-year (YoY) PPI rose +1.6%, higher than the expected +1.3% and up from last month’s unrevised +0.8%. The cost of wholesale energy surged almost +11% in August to drive the increase in the PPI. The cost of services, a major driver of inflation, rose a modest +0.2% last month. Core PPI, which strips out volatile food and energy costs, was up +0.2% for the month, in line with expectations and down from the prior month’s positively revised +0.4% (up from +0.3%). Year-over-year, Core PPI was unchanged at +2.1%, its lowest annual level since January 2021, and in line with expectations and down from the prior month’s unrevised +2.4%. Wholesale prices have decelerated even faster this year than consumer prices, which may just lead inflation down faster than the Fed expected. 
• August Import Prices rose at the fastest pace since May 2022, up +0.5%, more than expectations for +0.3% and the prior month’s +0.1% (revised down from +0.4%). Year-over-year, import prices were down -3.0%, versus -4.6% for the year ending July. Imported fuel prices rose +6.7% in August, the biggest gain since March 2022, after a +3.6% rise the prior month. Nonfuel import prices were flat for the month. Export Prices were up considerably, rising +1.3%, also the biggest upward move since May 2022. From a year ago export prices fell -5.5%.
• The preliminary September report of the University of Michigan Consumer Sentiment Index fell for the second straight month to 67.7 from 69.5 in August, missing expectations for 69.0 and down from a 22-month high of 71.6 in July. The Current Economic Conditions component dropped to 69.8 from 75.7 the prior month. The Consumer Expectations component rose to 66.3 from 65.5 in August. One-year inflation expectations fell to +3.1% from +3.5%–tied for the lowest since January 2021. The five-year inflation expectations also fell a bit to +2.7% from +3.0% and matched the lowest reading since December 2020.
• According to the Commerce Department, the advanced read on August Retail Sales showed a fifth month of gains, rising +0.6%, far ahead of expectations for +0.1% and the prior month’s downwardly revised +0.5% (+0.7% originally). Retail sales represent about one-third of all consumer spending and are seasonally adjusted but not inflation adjusted. Retail sales ex-autos increased by +0.6%, also beating expectations, which was for a +0.4% increase, but trailed the prior month’s +0.7% gain (a big upward revision from the original +0.1%). Sales ex-autos and gas were up a more modest +0.2%, still above expectations for -0.1% decline, but down from the prior month’s +0.7% (revised up from +0.1%), highlighting how the sharp +5.2% increase in receipts at gas stations carried the headline increase. Sales rose in clothing and electronics stores, but other sectors, like grocery and department stores, showed some deceleration from the prior month. The Control Group, a figure used to calculate GDP, was up just +0.1%, above expectations for a -0.1% decline but below the prior month’s +0.7% (revised far higher from the originally reported +0.1%). Year-over-year Retail Sales were up +2.5%, continuing a deceleration in the annual pace of retail sales growth, which was running at +7.4% to start the year in January. 
• The Small Business Optimism Index rose again in July but remains below the long-term average, as quality of labor and inflation concerns continue to weigh on business owners. The National Federation of Independent Business (NFIB) reported that business optimism fell to 91.3 in August from 91.9 in July, missing expectations for 91.5. The decline was led by a 7-percentage point drop in the Expect Economy to Improve index, dropping it to -37%, the lowest of the 10 components. Only three components increased, led by the Earnings Trend index, which increased +5 percentage points to -25%. Concern over Inflation ticked up but remains the second biggest concern among owners, with Quality of Labor their single most important challenge. Respondents reported Raising Selling Prices in August for the first time since November 2022 and was the largest monthly increase since May 2022. A surprising jump in Compensation plans shows that the labor market continues to be healthy.
• August Industrial Production rose +0.4%, down from the prior month’s +0.7% (revised down from +1.0%), but above expectations for a +0.1% rise. Manufacturing output rose +0.5%, reversing a -0.5% drop the prior month. Motor vehicle assemblies spiked +8.8%, and the output of utilities surged +5.4% following a -3.0% decline the previous month, as high temperatures in July increased demand for cooling. Capacity Utilization, a measure of potential output, increased to 79.7% from 79.5% the prior month, which was revised up from 79.3% and where it was expected to come in. The strike by the United Auto Workers could put a dent in industrial output on top of headwinds from higher interest rates and a slowing global economic activity.
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, surged nearly +21 points to 1.9 in September, far above expectations to improve to -10.0 from the prior month’s -19.0 reading (readings below zero indicate economic contraction). New Orders rebounded +25 points after the prior month’s -23.2 point plunge, sending it back to positive territory at 5.1 — the highest level since April. On the downside, inflationary pressures persisted with Prices Paid and Prices Received both increasing again. Employment was narrowly lower, and unfilled orders and inventories continued to shrink, suggesting manufacturers are clearing backlogs.
• Weekly MBA Mortgage Applications fell -0.8% for the week ended September 8, following the prior week’s -2.9% drop, and is the seventh decline in the last eight weeks. The Purchase Index rose +1.3% following a -2.1% fall the prior week, and the Refinance Index dropped -5.4% following a -4.7% drop the prior week. The average 30-Year Mortgage Rate rose to 7.27% but remains 1.26 percentage points higher from a year earlier.
• Weekly Initial Jobless Claims rose +3,000 to 220,000 for the week ended September 9, below expectations for 225,000 and last week’s 220,000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose +4,000 to 1,688,000 in the week ended September 2, below consensus for 1,695,000, and down from last week’s reading of 1,688,000.

The Week Ahead

Monetary policy will be a big focus next week as the Federal Reserve and other major central banks announce interest-rate decisions. The Federal Open Market Committee concludes a two-day meeting on Wednesday. Futures markets are overwhelmingly pricing in no change in the fed-funds rate. On Thursday, the Bank of England is expected to raise its target interest rate by a quarter of a percentage point to +5.5%. Then, on Friday, the Bank of Japan is likely to keep its rate unchanged at -0.1%. Last week, the European Central Bank unexpectedly raised its target interest rate for a 10th-straight time, by a quarter of a point, to 4%.

The economic calendar will feature a bunch of housing data, with the National Association of Home Builders Housing Market Index for September, Housing Starts and Building Permits from the Census Bureau on Tuesday, and Existing Home Sales from the National Association of Realtors on Thursday. Outside of the housing market, the Conference Board reports its Leading Economic Index (LEI) on Thursday, and S&P Global will release its manufacturing and services Purchasing Managers’ Indexes (PMIs) for September on Friday.

Did You Know?

TRIPLE-WITCHING – Friday, September 15, was triple-witching day, which happens four times a year on the third of March, June, September, and December and marks the simultaneous expiration of 1) stock options, 2) stock index futures, and 3) stock index options. With all those contracts expiring on the same day, triple-witching days typically bring the combination of high trading volume and volatility. True to form, in the largest September options expiration on record, the CBOE Volatility Index (or VIX Index) was up +8% on Friday, and trading volume on the major U.S. stock exchanges were at, or near, double the average (Source: The Wall Street Journal).

EURO STEP– The European Central Bank (ECB) raised its deposit rate a quarter percentage point, to a record 4%. It was the 10th hike in a row by the ECB, moving the rate from below zero last year. The central bank signaled that this move might be enough to combat inflation but didn’t rule out further increases (Source: The Wall Street Journal).

FALLING BEHIND – The U.S. inflation-adjusted median household income fell for the third consecutive year. It was $74,580 in 2022, down from 2021’s estimated $76,330, the Census Bureau reported. High inflation last year weighed down household income gains (Source: The Wall Street Journal).

This Week in History

LEHMAN COLLAPSE – Fifteen years ago, on September 15, 2008, Lehman Brothers filed for bankruptcy. It was the largest bankruptcy filing in U.S. history and set off the Global Financial Crisis. On the same day, insurance giant AIG saw its share sink -61% as it faced a severe cash crunch. The Wall Street Journal declared, “The American financial system was shaken to its core” (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.