Bad Medicine?

As the Fed’s fight against inflation continues, the path to lower inflation is paved with bitter medicine. The markets’ reaction to this medicine is rarely positive, but we see it continuing to accomplish its goal. As Fed policy moves onward, markets are pricing in less probability of a rate hike November 1st. The CME FedWatch Tool shows only an 11% chance of a 0.25% rate hike priced in the markets. It appears that the increased geo-political uncertainty with the Israel-Hamas war, coup in Niger, and ongoing Russo-Ukrainian war favors cautious FOMC policy, as the situations and their impact is unclear and evolving.

Weekly Performance

Inflation data was the star of last week, with PPI (Producer Price Index) and CPI (Consumer Price Index) data releasing on Wednesday and Thursday, respectively. The headline PPI print came in hotter than expected, at 0.5%1 — a 0.2% surprise over estimates. It was, however, a decrease of 0.2% month-over-month, which was mostly mirrored by core PPI at 0.3%1 (also down month-over-month and above expectations). CPI followed with headline CPI at 0.4%1, which was 0.1% over expectations, and core CPI at 0.3%1, which came in in line with expectations. Both CPI prints were lower than the prior month.

As some risk-averse investors look for lower volatility options, a common question exists surrounding the difference between U.S. Treasury Bills, Notes, and Bonds, which are all debt instruments issued by the United States government. Treasury Bills are issued with maturities of one year or less and do not pay a coupon but are sold at a discount and mature at their full value. Treasury Notes are issued with maturities of two to ten years and pay a coupon every six months in addition to principal being repaid at maturity. Treasury Bonds are issued with maturities longer than 10 years (typically up to 30 years) and pay a coupon every six months in addition to the repayment of principal at maturity. Treasury Notes and Bonds can be purchased at a premium or discount depending on current market conditions. Today’s interest rate environment is making these instruments quite popular for short-term holding periods.

Geo-political news last week focused on the Israel-Hamas war, organized labor, and the U.S. Speaker of the House opening. Following Hamas’s terror attack on Israel and Israel’s formal declaration of war, Israel has conducted over 6,000 strikes on Hamas targets in Gaza while preparing for a land assault. The United States of America has deployed the USS Gerald R. Ford Carrier Strike Group in the Mediterranean in a show of support for Israel. In the United States, organized labor saw the writers’ strike end , the United Auto Workers’ strike expanded, Las Vegas hospitality workers went on strike, and Kaiser Permanente saw a three-day strike by many front-line healthcare workers. Following Fmr. Speaker Kevin McCarthy’s ouster last week, little progress has been made finding his replacement, and the House is unable to conduct most business until one is elected. Rep. Steve Scalise dropped out of contention after being unable to solidify the necessary votes and Rep. Jim Jordan has emerged as the front runner. With a government shutdown looming on the horizon without further funding and two wars in progress, we believe the inability to act leaves markets unsteady.

As we move into earnings season and the leaves change, we also saw an early start to the Christmas shopping season, as Amazon introduced an October Prime Day. Other retailers followed suit with “anti-Prime Day” and early Holiday sales. In the week ahead, Retail Sales data on Tuesday and Housing data on Wednesday are the most-anticipated data points, while developments in the Israel-Hamas war will be closely watched, with the conflict threatening to spread through the Middle East. When terrorism causes suffering on Earth, it is imperative to remember that the victory over death is already won. “For God so loved the world, that he gave his only Son, that whoever believes in him should not perish but have eternal life” – John 3:16.

1. Seasonally Adjusted, Month over Month

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