Fed At The Crossroads
Inflation numbers not so transitory.
September & October are volatile months for the market, historically.
COVID numbers continue to improve.
Markets are lower this morning as shares in China Evergrande have plummeted. Worries over the real estate developer's ability to repay a portion of its $305 billion debt has caused company's shares to drop as much as 31%, leading to worries of contagion in other Chinese companies. Equity markets in the U.S. have been range-bound since hitting all-time highs on Sept 2nd. We could see more seasonality in stocks as September is a historically weak month for returns and October is historically the most volatile month for stocks.
On the economic front, releases were positive overall last week. Retail Sales for August were due to come in negative for the 2nd consecutive month, but the numbers came in at +0.7%. Both the NY Empire State and Philly Fed manufacturing indices came in much higher month-over-month. The flash reading on Consumer Sentiment is higher than the previous month. Weekly Jobless Claims were slightly higher than the previous week, but more importantly, Continued Claims dropped by more than 180,000 week-over-week. That’s the largest one-week decline in over one month. The end of extended pandemic unemployment benefits over the Labor Day weekend may be abetting the decline in Continued Claims.
There is continued evidence that inflation is not "transitory" in nature as the Fed has advertised. Though the Consumer Price Index seemed to slow in August, the previous week’s Producer Price Index showed a continued move higher in August. Producers may be willing to bear the higher input costs from inflation for a time, but eventually, those costs will have to be passed onto the consumer. The movement higher in commodities points to a rise in inflation that beyond the "historical norm." On average, the price of Oil, Coffee, Cotton, Wheat, Sugar, Soybeans, & Corn has increased 76% over the last 12 months. The Fed, meanwhile, is using the overnight lending market to tamp down on loans made by financial institutions. By utilizing "reverse repurchase agreements," the Fed is incentivizing banks and financial institutions to keep money in higher interest rate credit accounts in lieu of loaning the money out to commercial customers, thereby keeping the flow of money low.
On the COVID front, it appears that cases are on the decline. The positive test rate has dropped from 11.3% to 8.7% in just 30 days. Hospitalizations are down, as well, dropping 3.6% since peaking two weeks ago. An FDA advisory panel recently rejected the use of COVID booster shots to the general public, reserving the recommendation of boosters for only high-risk persons. This is good news, as it would appear the general public should be able to combat the virus with normal vaccines and other treatments.