The futures markets are pointing to a positive open to today’s stock trading. Much-anticipated economic data for the month of August was released prior to the bell. Readings from the Bureau of Economic Analysis showed that the headline Personal Consumption Expenditures (PCE) price index rose 0.4%, month over month, above economists’ outlook and the July pace of 0.2%. The core PCE, which excludes volatile food and energy costs, increased 0.1%, versus an anticipated monthly rate of 0.2% and the previous-period expansion of 0.2%. Year to year, the PCE and core PCE indexes respectively displayed growth of 3.5% and 3.9%, matching the estimated advances, and comparing fairly well with July’s gains of 3.4% and 4.2%. Importantly, the easing of year-over-year core inflation will factor in a big way into the Federal Reserve’s short-term interest rate policy.
Also before the start of today’s stock trading, investors got a read from the same government bureau on personal income and personal spending for last month. Income grew 0.4%, matching Wall Street’s outlook and above the prior pace of 0.2%. Spending was up 0.4%, also in line with estimates but more modest than the previous rate of 0.8%. Thanks to a solid job market, the consumer remains in a reasonably good position to acquire the goods and services he/she requires. That said, spending is becoming more focused on staples, rather than discretionary items. Additionally, August data was reported revealing that the U.S. trade deficit narrowed to $84.3 billion from $90.9 billion in July, retail inventories stepped up a surprisingly strong 1.1%, versus 0.2% prior, and wholesale inventories fell 0.1%, compared to a 0.2% decline a month earlier. Despite the gain at the retail level, on the whole, inventories appear to be in better balance in the wake of the disruptive coronavirus pandemic.
Later this morning, the University of Michigan will unveil its final measure of consumer confidence for September, which is expected to come in at an unremarkable level of 67.7. This past Tuesday, the Conference Board indicated, by its own measure, a month-to-month easing of confidence. It’s apparent that consumers, increasingly weighed down by rising borrowing costs, are becoming less optimistic about their financial futures.
Federal Reserve officials have two more meetings scheduled, one in November and another in December, before the close of 2023. The consensus on Wall Street is that the central bank will raise the federal funds rate by 25 basis points, to 5.50%-5.75%. Chairman Powell recently pronounced that short-term rates would probably stay higher for longer than the Street previously expected to bring the inflation rate down to about 2%. Too, he suggested that possible rate cuts in 2024 would be less than anticipated, depending on incoming economic data. The emergence of a recession could quickly change this posture. At the same time, Mr. Powell reiterated that the Fed would continue to reduce its balance sheet holdings of bonds, also known as a quantitative tightening of the nation’s money supply.
Under the current Fed policy environment, short-term and long-term U.S. Treasury bond rates have moved closer to the 5% mark. Short-term bond rates remain higher than long-term bond rates, and such an “inversion” is often a forerunner to an economic downturn. Still, many on Wall Street believe long-bond rates will rise, reversing the inversion; that wouldn’t mean a recession will be avoided. A greater number of investors, consumers, and corporations seem to be coming to the conclusion that borrowing rates will stay well above the low levels that the economy had enjoyed for more than a decade.
Bonds have become more competitive in relation to equities. Nevertheless, it’s prudent to remain invested in the stock market. We advise maintaining good sector diversity within individual portfolios. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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