Dear clients and friends,
At Perseus Wealth it is important to us that you are well informed about what is happening in the markets. Here are a few of the key topics of conversation that deserve the most attention this month. If you have any questions or would like additional detail, we would love to participate in further discussions.
What’s Happening: August’s inflation report was a negative surprise for economists and the markets. Lower gas prices were expected to help somewhat but the overall Consumer Price Index still wound up rising 0.1% over the month and 8.3% over the year. A Bloomberg survey showed economists had expected the CPI to fall 0.1% and the direction of the surprise sent markets tumbling, with the S&P 500 falling over 4% the day the report was released. Lower gas prices were just about the only glimmer of good news since prices rose on most other major items and core prices, which the Fed watches more carefully and which excludes food and energy, increased 0.6% in August.
While the Fed is trying to cool the economy, the labor market has yet to get the news. Initial jobless claims continue to hover in the low- to mid-200,000s and the economy continues to add jobs, with 315K new jobs in August, following July’s 526K new jobs. Robust job gains have significantly calmed recessionary fears and raised hopes that it could be possible, even if not probable, for the Fed to navigate a soft-landing. However, a continued hot job market will also force the Fed to act more aggressively to try to tamp down inflation.
Retail sales rose 0.3% in August, though sales in July were revised down to -0.4%. Along with lower gas prices, other categories, such as furniture, online sales, and electronics, were also weak. Consumers continue to pivot spending to services, with restaurants up 1.1%. As consumers continue to adjust their spending away from goods, strength in services could signal a healthier consumer than the headline figure over the last two months may indicate.
The bottom line: The Federal Reserve continues to have a difficult road ahead. Inflation continues to be stubborn: prices continue to rise across much of the economy with a major driver of that being a tight labor market keeping upward pressure on wages which then flow into the rest of the economy. Major components of core CPI, such as shelter, have yet to show any sign of letting up. While the risk of a recession in the first part of this year having been avoided, the inflationary environment appears to put the Fed in a hawkish position for at least a bit longer, taking its toll on future economic performance. Markets reacted swiftly following August’s inflation report and bouts of volatility may continue until there is a clear case that inflation is moving in the right direction.
Update: In fact, as this newsletter was being finalized and in additional support of the volatility expectations mentioned in the Bottom Line above, the Fed just announced that it has increased the Fed rate by another 0.75% to a new level of 3.00-3.25% from its level of 0.00-0.25% less than a year ago. Perhaps more importantly, the Fed also updated its “dot plot” or expectations for the 2022 and 2023 year-end expected Fed rates: 4.40% and 4.60% respectively. Given the Fed’s two remaining meetings in November and December for the rest of the year and “reverse engineering” the dot plot expectation, the Fed has seemingly pre-announced two more “large” increases of another 0.75% hike, followed by a 0.50% increase (or some other less desirable combination of increases to achieve another 1.25% in hikes) between now and year-end. U. S. equity markets responded to the Fed’s actions and projections by falling more than 1.5% on average, despite having opened the day to the upside. When combined with the first two quarters’ negative GDP results, the Fed’s actions (and anticipated actions) appear to enhance the likelihood of further volatility for the immediate future.
Sean and John
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.
 Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
 Department of Labor, https://oui.doleta.gov/unemploy/claims.asp
 Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
 Census Bureau, https://www.census.gov/retail/index.html