Sightline Weekly Market Update: Has Inflation Peaked?
Equity markets ended the week higher after last week’s CPI reading was lower than expected, fueling optimism that inflation might have peaked and may trend lower in the coming months. The Nasdaq led the way, jumping more than 8% weekly, benefiting from falling yields on bonds. Growth stocks, particularly technology and internet stocks, came to life after reeling from weaker-than-expected earnings in the past couple of weeks. Except for the UK, European equities, which also responded to the US inflation data, appeared to lift investors’ sentiments, finishing the week with strong performance. The UK suffered from a negative 0.2% GDP print for Q3 and finished the week down slightly at 0.23%.
On Monday, the Federal Reserve reported consumer credit for September rose $25 billion, down from a revised $30.2 billion in August. Revolving credit rose 8.7% in September compared to August’s 18.1% gain. Revolving credit grew by 12.9% for the quarter as consumers used credit cards to combat higher prices.1 On Tuesday we learned that the NFIB’s Small Business Optimism Index level declined to 91.3 in October, falling 0.8 points. The latest reading is the 10th consecutive month below the 49-year average of 98. Business owners expecting an improvement in business conditions over the next six months fell two points to a negative 46%. Inflation, supply chain issues and labor shortages continue to plague small business owners.2 On Wednesday, the Richmond Fed President Thomas Barkin repeated the narrative of price stability by saying, “We have been mandated by Congress to maintain stable prices, and we are doing what it takes to get inflation back to our 2% target.” In a conciliatory tone, Barkin added factors that influence inflation such as supply, commodity, demand and wage pressures are easing and should permit the economy to be in a better balance in the months ahead.3
On Thursday, the Bureau of Labor reported inflation for October rose 0.4% and a decline in the yearly rate to 7.7% from 8.2% in the earlier month. The index for shelter contributed over half of the monthly gain due to the shelter weighting in the index. The energy index also increased, with gas and electricity somewhat offset by the decline in natural gas. Used cars, apparel and medical services declined in the month. Also encouraging, the core rate, which excludes food and energy, rose 0.3%, which is a slower pace than analysts anticipated. The annual rate ex-food and energy fell to 6.3% from 6.6% reported in September. 4
Also, on Thursday, initial unemployment claims for the week ending November 5 were 225,000, an increase of 7,000 from the week before. Claims for all programs ending October 22 increased 12,522 to 1,263,094.5 It is possible that over the coming months, we will see claims data grow with several large companies significant layoffs.
On Friday, the University of Michigan’s gauge of consumer sentiment fell to its lowest level since July. The overall index fell 5.2 points to 54.7 compared to the previous reading of 59.9. The survey of Current Economic Conditions fell 7.8 points to 57.8 from the last reading of 65.6. The Index of Consumer Expectations fell to 52.7 from 56.2. Declines were attributed to inflation and the worsening economic outlook. The sentiment was broad-based across geography, age, education and politics. The latest reading was taken before the election, which could result in changes in coming surveys. 6
Taken in isolation, the outlook for North America indeed looks bleak. However, from a global context, the outlook for North America could benefit from the more significant turmoil of other regions and eventually from the capital flows into North American private assets. In our opinion, we expect swings in investor sentiment which will create more volatility when compared to the recent decades.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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