US stocks stabilized a bit on Wednesday, registering small gains after Tuesday’s tumultuous session. The sense of relative calm was restored by the Labor Department’s producer price (PPI) report, which provided reassurance that inflation is indeed on a slow, downward trajectory. By Wednesday’s close, the Dow ended essentially flat, the S&P 500 added 13 points and the Nasdaq rose 86. In Canada, the TSX recorded a modest 81-point gain.
All four North American indexes were back in the red Thursday as the prospect of higher rates continue to weigh on sentiment. By Thursday’s close, the Dow had dropped 173 points, the S&P 500 fell 45 and the Nasdaq lost 167. In Canada, the TSX surrendered 166 points, weighed down by falling oil prices.
In the US bond market on Thursday, two-year Treasurys climbed to 3.87%, while 10-year notes rose to 3.46%.
US Indexes on Pace to Lose 3% for the Week
For the four trading days covered in this report, the Dow lost 1,190 points to close at 30,962, the S&P 500 dropped 166 points to settle at 3,901, while the tech-heavy Nasdaq sunk 560 points to close at 11,552. In Canada, the TSX lost 213 points to end at 19,560.
Strategy
US inflation rose 8.3% year-over-year (YoY) in August
US inflation rose 8.3% year-over-year (YoY) in August, the second straight decline after July’s 8.5% reading, but higher than consensus expectations of 8.0%, according to data released by the Bureau of Labor Statistics. Prices were up 0.1% on a month-over-month (MoM) basis after being unchanged in July, also outpacing consensus calls of a 0.1% contraction. Gasoline costs fell 10.6% MoM, slightly offset by higher electricity and natural gas prices, causing the energy subindex to decline by 5.0% compared to July. Meanwhile, most other categories continued to cast upward pressure on inflation. Food prices were up 0.8%, as was the price of new vehicles (+ 0.8%), apparel (+ 0.2%), and transportation services (+ 0.5%). Shelter, which accounts for about a third of consumer prices, remained persistently high, with rents and owner’s equivalent rent each rising 0.7% during the month. Core CPI, a measure of inflation that excludes the volatile food and energy categories, was up 6.3% YoY (5.9% in July) and 0.6% MoM (0.3% in July), a sign that price pressures remain broad-based. Because inflation is affecting a wide range of categories, we think the US Federal Reserve (the Fed) will likely implement its third consecutive threequarter point hike at next week’s meeting. Moreover, the updated Summary of Economic Projections and accompanying dot plot will be worth noting, as it may show a higher estimation of the terminal rate from some Fed members. Over the long-term, we think inflation and interest rates will settle at levels that support economic growth, however, the length of time it takes to reach the equilibrium level will be dependent on the future path of monetary policy and the ensuing response from the economy. Although today’s CPI figure is just one data point, it could prompt further aggressive policy tightening, which will reduce the likelihood of a soft-landing scenario (one where the Fed successfully reduces inflation without inducing a recession).
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