Market Monitor: September Mid-Month Update
Headlines and Highlights
- Inflation remains stubbornly high: The Consumer Price Index climbed 8.3% over a year earlier, a slight deceleration due to the recent drop in gasoline prices. But core CPI, excluding food and energy, rose 0.6% from the previous month and was up a still-elevated 6.3% year over year. This ongoing rise in consumer prices ramps up pressure on the Federal Reserve to keep raising rates aggressively.
- Rate hike fears hit markets: A broad sell-off triggered by the disappointing inflation report resulted in the worst day for stocks in over two years. Markets now expect the Fed to push the federal funds target rate – currently 2.25%-2.5% – above 4% and keep it there for an extended period. The S&P 500 fell 4.3% on Tuesday and was down 17.2% for the year at mid-month. U.S. large caps, small caps, REITs and international stocks all flipped from positive to negative for September. Bond prices also sank as yields rose sharply, reflecting higher rate expectations.
- ECB follows Fed’s lead: The European Central Bank raised interest rates by an unprecedented three-quarters of a percentage point, stepping up its fight on inflation that has climbed above 9% in the eurozone. Europe also faces its worst energy crisis in decades as a result of Russia’s natural gas cuts. However, the latest expectations that reserves are plentiful and supplies are unlikely to run short this winter have helped calm markets and caused gas prices to fall 40%.
Chart of Interest
Revised upward: Markets priced in higher rate expectations (as of 9/15) after the CPI report.
Sources: CME FedWatch, Altair Advisers
- We expect the Federal Reserve to raise the federal funds rate by 0.75 percentage point next Wednesday, boosting the target rate to a range of 3%-3.25%. A third straight increase of that unusually large size would be in keeping with Chair Jerome Powell’s recent reaffirmation that ultimately reducing inflation back to around 2% is the central bank’s “overarching focus.”
- Inflation should continue to trend lower from its June peak, when the Consumer Price Index reached an annual rate of 9.1%. The pace of decline has slowed, however, and will likely prompt the Fed to keep raising rates into 2023.
- The U.S. economy is on track to post a narrow GDP gain this quarter for the first time since 2021 despite slowing under the impact of restrictive Fed monetary policy and high inflation. Strengths in the labor market and industrial production are being offset somewhat by weakening data in manufacturing, housing and personal income.
- Consumers’ continued resilience is due in part to greater savings during the pandemic and should help the United States avoid a deep economic slump. A trend of higher wages also has contributed, bolstering household wealth. Retail sales rose 0.3% in August over the prior month, showing no letup in a category that accounts for two-thirds of the economy.
- We expect the outlook for markets to improve between now and the end of the year. Midterm election years are historically volatile, producing lackluster returns until late in the year when there is more clarity about the makeup of power in Washington. Stocks have tended to do well following elections regardless which party is in power; the S&P 500 has averaged a 15% gain in the 12 months after midterms since 1950.
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