Monday was mostly just about positioning going into the next day’s inflation print (although the surprisingly effective counter-attack by Ukrainian forces also came into play somewhat). A narrative slowly built throughout the day that maybe future inflation might not be as elevated or persistent as was previously feared and that we might expect to see an appetizing Consumer Price Index (CPI) number, boosted by the fact that three-years-ahead inflationary expectations dropped to 2.8%, the lowest since early 2021, in advance of Tuesday’s release of the latest data.
And then BOOM! The CPI announcement came out and it proved to be a massive blow to hopes of 1) imminent lower inflation, and 2) reducing the pressure on the Fed to keep hiking interest rates.
Overall consumer prices returned to their habit of moving higher again month-to-month rising 0.1% in August, after dropping to a zero increase in July and are up 8.3% over the past year. That compares to the 8.5% year-over-year figure reported in July but was higher than the expected 8.1% increase.
Food prices increased 11.4% from a year ago, in the largest twelve-month increase since Rod Stewart asked us to let him know if we liked his body and thought he was sexy in 1979. However, the report noted the food price increase was largely offset by a 10.6% decline in gas prices. The big problem was that Core inflation, which strips out those volatile food and energy prices, rose 0.6% last month, double July's 0.3% pace. Compared to a year ago, August Core inflation is higher by a staggering 6.3% compared to 5.9% in July. The high Core reading was particularly disturbing as it indicated a wide distribution of inflation throughout the economy and not just in food and energy.
The market showed no mercy in response. The recent rally was completely unwound and exposed as having been founded more on investor hopes than realistic assessments, which generally sums up a recent period of self-delusion by many market participants and pundits. No sector was spared in the ensuing bloodbath and we saw the worst single day for the stock market since the early weeks of the pandemic panic in 2020, with tech stocks whacked by far the hardest. Gold, oil and crypto got punched in the face as well. The only things that moved higher were market interest rates (up to very close to 4.0% in the benchmark 2 Year Treasury), the US Dollar and investor stress levels.
As the market licked its wounds on Wednesday, attention turned to CPI’s wholesale cousin, the Producer Price Index (PPI) which measures the inflation rate of raw materials.
When it came out, the PPI number slightly softened the blow of the CPI print, falling 0.1% in August. The headline annualized rate in August was 8.7%, almost a full percent lower than July’s rate and a little lower than analyst expectations. This was, of course, mostly driven by falling energy prices over the last month or two.
The market felt like it had dodged a bullet as the PPI failed to confirm the worst of the bad CPI news and stock prices stabilized for a while, helped by news that a possible US rail strike, that would have severely damaged domestic supply chains, had been averted and that the Chengdu lockdown was being eased in China.
But the broad decline resumed on Thursday and accelerated into Friday as investors seemed to decide they just weren’t comfortable owning risk assets in the current environment and the realization set in that virtually none of the conditions required to have the Fed back off its current hawkish stance have been met.
Things weren’t helped by FedEx (FDX), sometimes viewed as a barometer for the economy in general, who released an atrocious earnings report that cited huge and rapidly-worsening macro-economic deterioration as the reason and the CEO warned of an imminent “worldwide recession”.
The stock was punished, suffering its worst single day in history, plummeting more than 20% in a matter of hours. By the time the bell rang on Friday afternoon, mercifully bringing the week’s proceedings to a close, the S&P 500 had lost more than 4.0% since Monday morning, while the Nasdaq had tumbled 5.5%.
In last week’s report I highlighted the importance of the expectations for the Terminal Rate (the level at which the Fed stops raising rates) and, following the hot CPI number, the average market expectation has now shifted up from a midpoint of around 4.0% to above 4.4%, with the odds that the Terminal Rate will be above 4% now standing at 93%.
Any lingering hopes of less than a 0.75% increase in Fed Funds rate this week have now completely evaporated. Indeed, markets are even pricing in a non-trivial probability of a full percentage point increase on Wednesday.
The bottom line is this: stocks rallied off the early September lows on the hope of a quick decline in inflation and seeing as that idea is now in ruins, the S&P 500 is right back at those lows again. Looking forward to this week’s Fed interest rate decision, it’s the market expectations of the Terminal Rate that will be the key variable that likely will decide if the S&P 500 breaks down towards a test of the June 16th lows or embarks on yet another relief rally.
OTHER NEWS:
6% ceiling shattered .. The average rate on a 30-year fixed mortgage (see EXPLAINER: FINANCIAL TERM OF THE WEEK) hit 6.02% last week, up from 5.89% the previous week and 2.86% a year ago, according to a survey of lenders by Freddie Mac. The last time rates were this high was in the heart of the financial crisis almost fourteen years ago, when the U.S. was in a deep recession. The jump is one of the most obvious and hard-hitting effects of the Fed’s relentless campaign to curb inflation by lifting the cost of borrowing for consumers and businesses, slowing what was a red-hot housing market not so long ago.
Elon vs. Twitter .. Beaten-down Twitter (TWTR) shareholders overwhelmingly voted to stay strong on Tuesday and hold Elon Musk’s feet to the fire to enforce his commitment to buy the company. The billionaire continues his wiggling gymnastics to try to back out of the deal he made supposedly based partly on questions about a lot of fake “bot” accounts (wow, who knew??) and supposedly partly on the testimony of former Twitter security chief Peiter “Mudge” Zatko whose testimony has been described by his former employer as being “riddled with provable inaccuracies”. TWTR stock was almost unique on Tuesday as it actually ended the day higher on news of the vote although, like almost everything else, it ended up down for the week as a whole.
UNDER THE HOOD:
In looking at the recent market rallies, I have previously emphasized in this report how the lopsided heavy retreat in Supply relative to the rather timid expansion in Demand is typical of market advances that find it hard to sustain themselves and extremely untypical of enduring rallies off the bottom. They are also susceptible to collapsing upon themselves as soon as things get tough.
And so it proved as buyers showed themselves to be fearful wimps as the disturbing inflation news broke and a monumental withdrawal of Demand took place. It didn’t even need a huge increase in Supply to push markets right back where they had come from but as the week went on, that Supply level grew stronger anyhow.
In a market so weighted towards the tech sector, the complete rout of those stocks last week rippled brutally throughout the entire universe of US stocks as a whole.
Committed buyers need to pick themselves up, dust themselves down and start answering the call in a major way if this downtrend is going to be reversed. Longer term indicators need to stay above their levels from September 6th because if they don’t, then the likelihood that stock prices break down through the June 16th lows is magnified many times over.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
All eyes will be on the Federal Reserve next week, the Federal Open Market Committee's two-day meeting takes place on Tuesday and Wednesday to consider the extent of further interest rate rises. Futures pricing suggests the greatest odds of a third-straight rate hike of 0.75%, but a full 1% is not ruled out.
The Bank of Japan also announces a monetary policy decision this week. There's no change in interest rates expected there.
A smattering of major companies will report earnings this week, including Costco, AutoZone, Accenture, General Mills, Lennar and Darden Restaurants.
Economic data out next week will feature several indicators of the health of the U.S. housing market. There’s the release of the housing market index for September, housing starts for August and existing home sales for August.
US INVESTOR SENTIMENT LAST WEEK (outlook for the upcoming 6 months):
* ↑Bullish: 26% (up from 18% the previous week)
* →Neutral: 28% (down from 29% the previous week)
* ↓Bearish: 46% (down from 53% the previous week)
* Net Bull/Bear spread .. ↓Bearish by 20 (Bearish by 35 the previous week)
Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Weekly sentiment survey participants are usually polled on Tuesdays or Wednesdays
Source: American Association of Individual Investors (AAII).
LAST WEEK BY THE NUMBERS:
finviz.com
- Last week’s best performing US sector: Consumer Defensive (two biggest holdings: Proctor and Gamble, Coca-Cola) - down 0.6%
- Last week’s worst performing US sector: Technology (two biggest holdings: Apple and Microsoft) - down 18.5%
- The NASDAQ-100 fell harder than the S&P 500
- US Markets fell further than International Developed Markets and Emerging Markets
- Mid Cap stocks fell slightly less than both Large and Small Cap
- Growth performed worse than Value
- The proprietary Lowry's measure for US Market Buying Power is currently at 151 and fell by 18 points last week and that of US Market Selling Pressure is now at 162 and rose by 13 points over the course of the week.
- SPY, the S&P 500 ETF, is now back below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 35**. SPY ended the week 19.3% below its all-time high (01/03/2022).
- QQQ, the NASDAQ-100 ETF, is now back below its 50-day and 90-day moving averages and well below its long term trend line. The 14-day Relative Strength Index (RSI) reading is 33**. QQQ ended the week 28.4% below its all-time high (11/19/2021).
** RSI readings range from 0-100. Readings below 30 tend to indicate an over-sold condition, possibly primed for a technical rebound and above 70 are often considered over-bought, possibly primed for a technical decline.
- VIX, the commonly-accepted measure of anticipated upcoming stock market risk and volatility implied by S&P 500 index option trading (often referred to as the“fear index”) ended the week higher at 26.9 and is now back above its 50-day and 90-day moving averages as well as its long term trend line.
ARTICLE OF THE WEEK:This week .. A deep dive and full explainer of what we know so far about the recent federal student loan forgiveness program.
EXPLAINER: FINANCIAL TERM OF THE WEEK:A weekly feature using information found on Investopedia to try to help explain Wall Street gobbledygook (may be edited at times for clarity) .
FIXED RATE MORTGAGE
The term “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire term of the loan. This means that the mortgage carries a constant interest rate from beginning to end. Fixed-rate mortgages are popular products for consumers who want to know how much they’ll pay every month.
Several kinds of mortgage products are available on the market, but they boil down to two basic categories: variable-rate loans and fixed-rate loans. With variable-rate loans, the interest rate is set above a certain benchmark and then fluctuates—changing at certain periods.
Fixed-rate mortgages, on the other hand, carry the same interest rate throughout the entire length of the loan. Unlike variable- and adjustable-rate mortgages, fixed-rate mortgages don’t fluctuate with the market. So the interest rate in a fixed-rate mortgage stays the same regardless of where interest rates go—up or down.
Adjustable-rate mortgages (ARMs) are something of a hybrid between fixed- and variable-rate loans. An initial interest rate is fixed for a period of time, usually several years. After that, the interest rate resets periodically, at annual or even monthly intervals.
Most mortgagors who purchase a home for the long term end up locking in an interest rate with a fixed-rate mortgage. They prefer these mortgage products because they’re more predictable. In short, borrowers know how much they’ll be expected to pay each month, so there are no surprises.
The mortgage term is basically the life span of the loan—that is, how long you have to make payments on it. In the United States, terms can range anywhere from 10 to 30 years for fixed-rate mortgages; 10, 15, 20, and 30 years are the usual increments. Of all the term options, the most popular is 30 years, followed by 15 years.
The actual amount of interest that borrowers pay with fixed-rate mortgages varies based on how long the loan is amortized (that is, how long the payments are spread out for). While the interest rate on the mortgage and the amounts of the monthly payments themselves don’t change, the way that your money is applied does. Mortgagors pay more toward interest in the initial stages of repayment; later on, their payments are going more into the loan principal.
So, the mortgage term comes into play when calculating mortgage costs. The basic rule of thumb: The longer the term, the more interest that you pay over the life of the loan but the lower your monthly payments. Someone with a 15-year term, for example, will pay less in interest than someone with a 30-year fixed-rate mortgage, but their monthly payments will be higher.
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