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 | Weekly Market Update September 16, 2024
| Outlook The yield curve is a measurement comparing long-term bond yields to short-term bond yields. Much of the time, long-term yields are higher as lenders typically demand a higher interest rate because they are waiting longer to get paid back. A longer period of time introduces more uncertainty. For the past two years, the shape has been negatively sloped (aka inverted) with short-term bonds yielding higher rates. The reason for this inversion was due to the Federal Reserve having raised its target for short-term interest rates (specifically the Federal Funds rate) to stabilize consumer prices as inflation had picked up.
With inflation now largely in check, rates for many short-term bonds (specifically at around 2 years) have fallen in anticipation of the Federal Reserve lowering the Federal Funds rates. Finally, after two years, long-term yields (i.e. 10-year treasury bond) are higher than short-term ones (the 2-year treasury bond) making the yield curve “normal” in shape - once again.
The fairly significant decline in 2-year bonds, some may argue, means the market is anticipating an economic slowdown. We do not share this view. Currently, consumer spending growth is intact, layoffs are very low,1and consumer balance sheets remain healthy in our opinion.2However, we will keep our eyes on the businesses and consumers with higher credit risk since higher borrowing costs could eat into these borrowers' ability to repay debt - potentially serving as an early warning indicator of trouble.
. . . Market volatility has been in full swing in recent weeks. The S&P 500 rebounded on Friday to post its best week of the year, after last week’s selloff marked its worst week of the year. Both weeks posted moves of at least 4%.
The prior week’s selloff (week of Sept. 2nd) was largely driven by a concern over a slowing economy after a handful of labor market data displayed softer-than-expected conditions. September is also a historically weak month, which may have contributed to the performance.
Last week’s data (week of Sept. 9th) reversed the narrative after incoming data on inflation suggests the downward trend is intact, solidifying the expectation for a rate cut at the upcoming central bank policy meeting on Wednesday.
Despite recent causes for volatility, stocks have delivered strong gains and sit near record highs. For the week, the S&P 500 advanced 4.0%, the Dow Jones Industrial index rose 2.6%, the tech-heavy Nasdaq Composite index jumped 6.0%, and the Russell 2000 increased 4.4%.
Change in Prices - Consumer Price Index |  | August CPI Report Key Stats: - Headline CPI rose 0.2% for the month, in line with expectations.
- Headline CPI rose 2.5% year-over-year after increasing by 2.9% in July, and 3.0% in June.
- Core CPI rose 0.3% for the month, compared to expectations of a 0.2% rise.
- Core CPI rose 3.2% year-over-year, matching July’s 3.2% rate.
TheConsumer Price Index (CPI), a broad measure of the change in prices paid by consumers for a market basket of goods and services showed inflation drifted lower in August. The headline year-over-year rate came in at 2.5%, the lowest level since February 2021. Monthly headline inflation rose in line with expectations in August, while the core index, which excludes the more volatile categories of food and energy, came in slightly above expectations at 0.3%. The annualized core reading came in at 3.2%, in line with forecasts. Pricing moves continue to be driven by changes in shelter, energy, and food. The annualized energy index fell 4.0% due to a 12.1% drop in fuel oil and a 10.1% drop in gasoline. Fuel oil declined 1.9% for the month, while gasoline was down 0.6%. Food prices were relatively unchanged, rising 0.1% for the month as ‘food at home’ costs were flat and ‘food away from home’ costs rose 0.3%. Housing costs have been particularly troublesome for Federal Reserve officials and compose more than 70% of the CPI weighting. Shelter rose 0.5% for the month and is up 5.2% year-over-year. Other contributing factors include a 1.0% decline in used car and truck prices, a 0.2% drop in medical care expenses, partially offset by a 0.3% rise in apparel and a 0.5% rise in transportation services. Following the release, the futures market dialed in its expectations for the interest rate decision on Wednesday. Recent evidence of weakness in the labor market indicates the current fed funds rate is more restrictive than necessary. According to the CME Fed Watch tool, the futures market is pricing in a 65% chance of a 50bps cut and a 35% chance of a 25bps cut at the conference on September 18th.3 | [1]https://www.bls.gov/jlt/ [2] https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/ [3]CME FedWatch - CME Group | Upcoming Reports Monday: NY Empire State Manufacturing Index Tuesday: Retail Sales, Industrial Production Wednesday: Building Permits, Housing Starts, Crude Oil Inventories, FOMC Statement, Interest Rate Decision, Press Conference, and Economic Projections Thursday: Existing Homes Sales, Philadelphia Fed Manufacturing Index, Initial and Continued Jobless Claims Friday: FOMC Member Harker Speaks | Market Performance Stats |  | Thank you for reading. If you have any questions or concerns, or would like to speak with a member of our team, please click the button below to reach out to us. We would love to hear from you! | |
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