This morning brought another round of important economic news that the Federal Reserve will scrutinize ahead of its two-day Federal Open Market Committee (FOMC) meeting, which commences on September 19th. At 8:30 A.M. (EDT), we learned from the Labor Department that the August Producer Price Index (PPI) rose 0.7% and 1.6%, respectively, on a month-to-month and one-year basis. The core PPI, which excludes the more-volatile food and energy components, advanced 0.2% and 2.1%, respectively. The headline PPI figures were stronger than expected, similar to yesterday’s consumer price data, but the core PPI readings showed some easing in prices. . Overall, these data points are unlikely to change the narrative that the Federal Reserve will keep the federal funds rate higher for a longer period to effectively stamp out inflation.
In addition to the PPI news, we learned that initial jobless claims for the week ending September 9th totaled 220,000 which was up 4,000 from the previous week’s tally, but still indicative of a tight labor market. Claims numbers could pick up if an auto industry strike begins tonight. The overall strong labor market may add to the sentiment that the Fed is unlikely to change its monetary policy course anytime soon. The prevailing view is that the FOMC will keep the federal funds rate steady next week (in the range of 5.25% to 5.50%), but another quarter-point hike by the end of this year (possibly at the November meeting) remains on the table, given the aforementioned price and labor market readings. Earlier today, the Commerce Department reported that August retail sales increased 0.6%, which was higher than expected, but mostly reflected the recent surge in oil prices – a sort of involuntary spending category. This bears watching ahead of the soon-to-commence holiday shopping season, which will provide some more clues about the health of the U.S. consumer sector and the overall economy.
The equity futures, which were higher heading into the economic releases, are still presaging a positive opening when trading kicks off stateside. The economic reports caused Treasury market yields to initially gyrate, before moving higher. Also this morning, the European Central Bank (ECB) announced a quarter-point hike to its benchmark short-term interest rate, but also hinted that it may be the last hike in this cycle. The ECB also said that it must keep interest rates higher for a longer period, as inflation on the Continent remains too high. This may be adding to the modest upward pressure on U.S Treasury yields this morning.
The equity futures, which were higher heading into the economic releases, are still presaging a positive opening when trading kicks off stateside. The economic reports caused Treasury market yields to initially gyrate, before moving lower. Also this morning, the European Central Bank (ECB) announced a quarter-point hike to its benchmark short-term interest rate, but also hinted that it may be the last hike in this cycle. The ECB also said that it must keep interest rates higher for a longer period, as inflation on the Continent remains too high.
The recent surge in oil and gas prices is being closely monitored by both Wall Street and the Federal Reserve. If crude quotations both here and abroad continue to rise, it will make it more expensive for companies to run their operations and for families to manage their household spending budgets. The higher prices would have to be passed along to the retailers and consumers and that could put pressure on prices for other commodities and make the Fed’s task of reducing inflation more daunting. Thus, the sticky inflation could force the central bank to keep interest rates higher for longer, and the increased borrowing costs could hurt loan growth and ultimately economic expansion. It is not overly surprising that the recent increase in oil and gas quotations have boosted the shares of the energy companies, but hurt the stocks of the industrial and transportation (i.e., airlines) companies, which rely heavily on fuel to manufacture and transport products and passengers. There also is a looming deadline tonight for a United Auto Workers (UAW) strike if the union can’t reach a new collective bargaining deal. This may hurt the near-term supply/demand dynamics for the automobile industry and put pressure on prices for cars and trucks.
With continued uncertainty about inflation, the Fed’s thinking, and the health of the overall economy (the inverted Treasury market yield curve still suggests a recession is possible), it is very difficult to adhere to a strictly sector-based trading strategy. Thus, we think a diversified portfolio, consisting mostly of stocks of high-quality companies and cash is the best near-term strategy. The ample cash position also gives investors the flexibility to move if we get some more clarity on any of the aforementioned issues in the coming months. - William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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