Inflation Expectations Rising

U.S. equities fell into the weekend despite strong manufacturing data, as inflation expectations weighed. Stocks dropped for a second straight week. Last week all indexes finished down. The Dow down 0.05%, S&P 0.55%, and Nasdaq 0.46%.

Last Week

The S&P 500 and Nasdaq finished down less than 1%. Volatility rose with the VIX closing at a 1-month high. U.S. manufacturing numbers surged, and optimism for the next 6 months remained high. The Empire State index leapt 16 points to 34.3 in September. The Philly Fed index rose 11 points to 30.7, above estimates. Industrial production increased 0.4% in August after a revised 0.8% gain the prior month. The miss was largely due to Hurricane Ida and supply chain inefficiencies. Capacity utilization climbed to 76.4%, the highest rate since December 2019. U.S. retail sales surprised with a 0.7% gain in August despite supply chain issues and escalating Covid-19 cases.

Consumer inflation still showed a significant bump but came in less than feared. A New York Fed household survey showed inflation expectations continued to ramp up in August. Internationally, August wholesale prices sustained gains in Germany and Japan on solid global demand. CPIs in Canada and the UK surged to multi-decade highs. Weak Chinese data also contributed to the market’s choppiness. Retail sales only grew 2.5% in August versus forecasts of 7%. Industrial production came in slightly below predictions at 5.3%. British retail sales fell for a fourth straight month in August, even as payrolls increased by a record 241,000. Australia’s employment dropped more than expected, supporting the Reserve Bank’s decision to delay a review of weekly bond purchases.

Week Ahead – Inflation Expectations

All eyes will be on the FOMC as they wrap up their two-day meeting on Wednesday. Pressure is mounting for more specifics on tapering given recent U.S. economic data. According to a Bloomberg survey of economists, tapering is expected to begin in November 2021. Chairman Powell has indicated the decision to taper is independent of any decision to raise interest rates. With unemployment still above 2019 levels, the Federal Reserve is expected to be patient with increasing rates.

U.S. housing reports will also drop this week. The NAHB Index reported positive numbers. Housing start data reports on Tuesday, existing home sales on Wednesday, and new home sales on Friday. The S&P 500 is only down about 2% this month. More volatility may be on the horizon if issues like the debt ceiling gain momentum. Treasury Secretary Yellen has urged Congress to increase the debt limit as soon as possible to avoid any economic turmoil. The debate could influence the Fed’s actions as well.

Investors will focus on next week’s Fed meeting and the timing of tapering. Tapering is often viewed as a potential negative catalyst in the near term. However, strong economic growth coupled with record corporate profits can potentially keep the market moving higher. Investors will also be watching to see if Evergrande, the Chinese real estate company with a mountain of debt, poses any systemic risks to global markets. Year-to-date index performance; Dow up 13.00%, S&P up 18.02%, and Nasdaq up 16.73% through the close on Friday.

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