We hope you are doing well. Major U.S. stock indexes digested hotter-than-expected inflation data and tensions in the Middle East last week, finishing the week in a mixed yet resilient fashion.

Tallying the numbers, the S&P 500 added 0.45%, the Nasdaq 100 increased by 0.15%, and the Dow Jones Industrial Average rose by 0.79%.

Warming Inflation Data

Remember that cooling inflation trend? Wait, not so fast!

Producer Pricing Index (PPI): Producer pricing (wholesale pricing) showed a rise of 0.5% in September versus the Dow Jones estimate for a 0.3% rise. Markets didn’t seem to mind, with major U.S. stock market indexes showing only mild reaction and the S&P 500 finishing in the green last Wednesday.

But PPI was just a warm-up, or an appetizer, if you will.

Consumer Price Index (CPI): Released the next morning, consumer pricing for the month of September showed a bit hotter-than-expected data reading, at a 3.7% year-over-year rise versus estimates for 3.6%. On a month-over-month basis, data showed a 0.4% increase in consumer pricing vs. 0.3% expected.

Segments attributed to the rise included shelter (including rent) and energy. A bright spot was the price of food staying mostly stable.

While markets didn’t seem to mind the hotter PPI, CPI was a different story, with the S&P 500 finishing the daily session lower but in an orderly fashion. Tensions in the Middle East also picked up on the same day, so it is tough to pinpoint what the market was trading on more heavily.

We do see that inflation is still sticky, however. And at the end of the day, the consumer is the tail that wags the dog of the economy. That’s why markets care so much about CPI and not as much about PPI.

Moderating Treasury Yields

Treasury yields declined modestly last week, perhaps finding safe-haven demand from buyers on Middle East turmoil. The 10-year yield had its first weekly drop in the last six weeks yet remains “elevated,” closing the week near 4.628%. We have yet to trade at or above the psychologically critical 5.000% level in the 10-year note yield during the recent rise.

There is some chatter and logic about the “market doing the Fed’s work” with traders and investors pushing yields higher in the long-duration Treasuries like 10s and 30s. The market pushing the yields higher overall can contribute to chilling the economy and potentially translate to a Fed that is less eager to hike shorter-term rates.

FedWatch

Speaking of the Fed, the November meeting is just about two weeks away, and the chances of a 25-basis-point rate hike at the meeting declined last week. As of the market close on 10/13, probabilities showed a 93.8% chance the Fed leaves rates unchanged at the November meeting versus around 72.9% seven days prior.

When will the Fed cut rates? It’s what everyone wants to know. At the time of writing, the market favors a cutting Fed in the second half of 2024, according to the CME FedWatch Tool.

A lot can happen between now and then, and it is unlikely to see rapidly declining interest rates anytime soon.

Earnings Season Kickoff

Earnings season kicked off with major banks last Friday, as JPMorgan Chase, Citigroup, and Wells Fargo all reported quarterly results and growing profits. This week gives us more bank earnings as well as Netflix and Tesla quarterly results.

As of last week’s market close, some analyst estimates were calling for S&P 500 earnings (blended, year-over-year) for all companies to rise by an average of 0.4% overall, according to data from FactSet. If we get an actual earnings growth rate of 0.4% for the quarter in the S&P 500 companies, it would be the first quarter in the last four with year-over-year earnings growth.

It is a dynamic market backdrop right now: think earnings versus geopolitics and higher rates.

Middle East Sends Oil, Gold Higher

After one week of notable declines in crude oil pricing, the price of U.S. Crude Oil (West Texas Intermediate) rose, with the November contract higher by 5.92% and closing the week near $87.69 per barrel versus the previous weekly close near $82.79.

In classic geopolitical fashion, gold also rose on the Comex Exchange last week, with the December contract adding 5.22% to close near $1941.50 per troy ounce. Most of last week’s gains in gold came on Friday, as tensions escalated in the Middle East ahead of the weekend.

Gold may present a unique opportunity for certain investors with outlooks for a more dovish Fed in the future (think 2024-2025). Overall, during the Fed tightening cycle, the price of gold has held up rather well (better than many would have expected), even with many investors opting for interest-bearing fixed income.

The Takeaway

Picture a fulcrum or a seesaw. It feels like we are at or close to an inflection point in the markets, with one side having the prospects for a softer Fed sometime in 2024 and the other having presently elevated rates and inflation with a new weighty factor: the Middle East.

Earnings season is picking up steam this week, and we will get some fresh clues on the consumer Wednesday in the form of retail sales data for September. We’ll see if the month-over-month data can continue its recent estimate beats.

We will also pay close attention to what’s happening in the Israel-Hamas war, as our hearts continue to go out to those affected by the recent disturbing tragedies.

As things continue to develop this week, if there is anything on your mind regarding the markets or your portfolio, shoot me an email or give me a call. I am always here as a resource for you.

Sincerely,

The Trademark Capital^® Team

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