By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Stocks reached record highs over the week, helped by a strong start to the third-quarter earnings season. The S&P 500 (SPX) and Dow Jones Industrial Average (DJIA) were the two notable domestic indices to reach new heights, with weekly gains of 1.1% and 1.2%, respectively. SPX impressively marked its 44th all-time-high close of the year. While the Nasdaq Composite (COMP) failed to reach a new high, it did notch a respectable 1.1% gain for the week on the back of strong performance from technology stocks. All three indices recorded their fifth consecutive weekly gain as investors increasingly believe the U.S. Federal Reserve (Fed) is in the midst of leading the U.S. economy to a soft landing.
While stocks were higher by the time Friday rolled around, there was plenty of agitation intra-week as investors parsed updates on inflation data, the latest meeting minutes from the Federal Open Market Committee (FOMC), employment figures and earnings from large U.S. banks—all of this while they also assessed the economic impact of two major hurricanes and rising tensions in the Middle East. Stocks closed sharply lower on Monday as the yield on the 10-year Treasury move back above 4% for the first time since August. Much of the concern on Monday stemmed from the spreading conflict in the Middle East, specifically the impact it may have on energy prices. U.S. crude oil prices rose more than 3% on the day, settling at $77/barrel; as a result, energy was the only sector in SPX to end the day in positive territory.
Stocks rebounded on Tuesday despite tensions between Israel and Iran remaining in focus. Oil prices and, in turn, energy stocks, reversed course from their Monday gains and were one of the notable areas of weakness on an otherwise broadly positive day. Tuesday featured relatively little economic data with just an update on the U.S. trade deficit being the only report of note. The reported deficit was essentially in line with expectations, with exports rising 5.1% versus a year ago and imports up 7.6%. Economists were quick to point out that the impact of the recent dockworkers’ strike, as well as impacts from hurricanes, likely skewed data. The total volume of trade was up 6.5% from a year ago and tends to be a better indicator of economic trends versus looking at imports and exports in isolation.
Wednesday saw stocks continue their move higher after the Fed released its September FOMC meeting minutes. The minutes revealed that a “substantial majority” of the 12 FOMC members were in favor of a 0.50% interest rate cut rather than a 0.25% cut, which was also floated as an option. However, several members expressed concern that a 0.50% cut could be too aggressive given the current economic situation where inflation seems to be under control, but the labor market remains an area of concern. One member of the committee officially dissented, marking the first time a voting member dissented on an interest-rate policy decision since 2005. The minutes showed that several members felt that a 0.25% move would be in line with a more gradual path that would allow the committee to assess how restrictive conditions are as the economy shifted. Despite the disagreement at the Fed, investors agreed that it was still a good time to buy stocks, as the technology sector led the market higher.
Thursday and Friday brought updates on the inflation situation in the U.S. in the form of the Consumer Price Index (CPI) and Producer Price Index (PPI). Thursday’s CPI data unsettled markets, despite the 2.4% increase coming in at its lowest reading in more than three years. The Core CPI (which removes the impact of food and energy costs) reading was likely the source of alarm as it rose 3.3% from a year ago and showed an increase from August’s 3.2% increase. Friday’s PPI data showed a 1.8% increase from a year ago, which was in line with expectations and unchanged from the prior reading.
A more detailed look at last week’s data shows that the Fed probably still has some work to do despite recent comments that suggest employment is now the Fed’s number one priority instead of inflation. Energy prices continue to artificially pull headline inflation readings lower—CPI ex-energy is up 3.2% versus a year ago. This is a concern because energy prices can be volatile, and the ever-evolving conflict in the Middle East has the potential to reverse the favorable impact that energy prices have had on inflation. At the same time, services inflation (rather than goods) remains stubbornly high. The cost of shelter, which is the largest single component of the CPI calculation, was up 4.1% in last week’s data. As a result, services inflation (excluding energy services) is up 4.7% from a year ago.
In light of the apparent disagreement between FOMC members, I remain concerned that the Fed could find itself painted into a corner where it has committed to further rate cuts despite an economic reality that shows patience is the prudent move. The FOMC doesn’t meet again until November 6, shortly after the election. Current market expectations see an 86% probability of a 0.25% rate cut at that meeting. The Fed’s preferred measure of inflation, Personal Consumption Expenditures Price Index (PCE), won’t get an update until Halloween (ooh, spooky), so we will have to wait a while until we get the single-most impactful piece of data informing the FOMC’s upcoming decision. The last reading of core PCE showed that prices had increased 2.7% from a year ago, far higher than the Fed’s 2.0% long-term goal. A lot can change between now and the election, but I’m still struggling to see the case for significant rate cuts between now and the end of 2025. I wish the 12 members of the FOMC luck, because they have some difficult decisions to make in the months ahead.
This week’s economic calendar is relatively light with the bond market closed on Monday. Thursday will be the highlight of the week, with jobless claims, manufacturing data and an update on homebuilder confidence. The third-quarter earnings season ramps up this week and will likely be the primary source of entertainment for market watchers until the election in a few weeks.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, OCT. 14 | ||||
| 8:30 am | Bond market closed, bank holiday. | |||
| TUESDAY, OCT. 15 | ||||
| Empire State Manufacturing Survey | Oct. | 0.5 | 11.5 | |
| WED., OCT. 16 | ||||
| 8:30 am | Import Price Index | Sept. | -0.3% | -0.3% |
| THURSDAY, OCT. 17 | ||||
| 8:30 am | Initial Jobless Claims | Oct. 12 | 245,000 | 258,000 |
| 8:30 am | U.S. Retail Sales | Sept. | 0.3% | 0.1% |
| 9:15 am | Philadelphia Fed Manufacturing Index | Sept. | 2.9 | 1.7 |
| 9:15 am | Industrial Production | Sept. | -0.1% | 0.8% |
| 9:15 am | Capacity Utilization | Sept. | 77.8% | 78.0% |
| 10:00 am | Home Builder Confidence Index | Oct. | 42 | 41 |
| FRIDAY, OCT. 18 | ||||
| 8:30 am | Housing Starts | Sept. | 1.34M | 1.36M |
| 8:30 am | Building Permits | Sept. | 1.44M | 1.48M |
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