Although inflation is not just a U.S. problem, data last week showed that prices continue to rise. The Consumer and Producer Prices Indices (CPI and PPI) surprised to the upside, which is not what the Federal Reserve (Fed) or markets were hoping for. If inflation continues to remain a problem, then the Fed likely has to stay aggressive with their rate hikes. This data likely locks in another 0.75% rate hike for their November meeting.
The bond market reacted swiftly with yields climbing higher again last week. The lift in yields was driven by the more policy-sensitive short end of the curve, as traders priced in a higher potential stopping point for the Fed. Volatility in the bond market has been extreme this year and is set to remain high with the Fed continuing to roll assets off their balance sheet. International bond markets are not helping either, with yields swinging wildly in the U.K., causing yields here in the U.S. to move as well.
Earnings season will give a window into how companies are dealing with hot inflation and a more restrictive Fed. Last week showed that some banks are dealing with these cross currents sufficiently, while others are having to make tough decisions on their costs. The S&P 500 dropped again last week and hit another low for the year but closed the week only down about 1.5%. A potential benefit for equities is that a lot of bad news is already priced into the market. This was proven with stocks bouncing on the worse-than-expected CPI report last week.
A look back
- Global stocks made a new low for the year last week. Emerging markets led the way down, falling over 3.8%.
- U.S. Treasury yields rose again last week with the 2-year yield rising more than the 10-year yield, further inverting the curve.
- Inflation data came in hotter than expected for September’s readings of CPI and PPI; the core segments showed the biggest surprises.
A look ahead
- Earnings season will continue this week after several large banks kick-started the Q3 reporting period last week.
- 10 Fed officials will give speeches this week as they try to frame their outlook given the persistence of inflation.
- Economic releases: Industrial Production, Housing Starts, Building Permits, Existing Home Sales, Leading Index.
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