Stocks pulled back as interest rates continued to push higher. Thus far, this move has not seemed to bother equities as it has been measured and deliberate. However, at some unknown point in time, should the move continue, higher interest rates will pose a problem for the market. Presently, there is more than an 80% chance the Fed will hike by ¼% at their upcoming meeting this week. Should this occur, we think it will be welcome news for stocks as it will illustrate the determination of the Fed to get inflation down to their two percent target.
Investors must also keep in mind that this historically challenging seasonal period is being exacerbated by the upcoming midterms. So, expect a bit of choppiness over the next few weeks.
- U.S. Diesel Prices hit $6/gallon for the first time ever Friday morning as the conflict in Iran dragged on pushing supplies much lower than was anticipated at the onset. According to data from AAA, those that purchase diesel are paying approximately 63% more than they were one year ago. These are the people that transport food and other goods all over our country. This is not receiving the media attention that it should.
- Within an article entitled “Treasury's are losing foreign appeal in a historic capital flow reversal – and here’s one trade investors favor instead” was the following from Global Head of FX Research at Deutsche Bank George Saravelos noted that “for the first time ever outside of the GFC, equity inflows into the U.S. have overtaken fixed income.” Saravelos asks rhetorically, “why do foreigners love U.S. equities but dislike U.S. bonds? Because the American private balance sheet is booming – AI, record profit margins – but the public sector balance sheet keeps worsening (6%+ deficits until the eye can see).”
- According to Gad Levanon, Chief Economist at the Burning Glass Institute, “there’s a rapidly growing supply of people with a bachelor’s degree, and you have a rapid decline of people who don’t.” The study blamed the lack of paradox on four factors – 1) The AI Powered “Expertise Upheaval,” 2) The Post-Pandemic Hiring Shift, 3) AI as Accelerant and 4) The Graduate Glut. It will be of consequence whether this is temporary or a permanent structural change in the labor force, especially as AI becomes more advanced.
- An Anthropic Safety Researcher Evan Hubinger said on X that he along with Jacob Coxon, another researcher who recently resigned from the company “earnestly believe AI could kill all humans! I personally think it is >10% within the next decade. I believe Anthropic is trying its best, but we do not yet have a plan to solve alignment for superintelligence and are not clearly on track to.” Coxon added, “do not underestimate the power of this technology. These will soon be superhuman systems that can hack anything, revolutionize any field overnight, and acquire real power and resources.” Perhaps a little dramatic but maybe what is needed to better monitor advances in this promising yet perhaps civilization altering technology.
Economic Data That Drove Market Sentiment This Past Week…
- Inflation at the Retail Level as measured by the Consumer Price Index rose 0.4% during August (3.4% y/y), after climbing 0.1% during July. The CPI has fallen from a y/y high of 9.1% during June 2022 but remains stubbornly elevated relative to the Fed’s 2.0% target. Energy prices rose 2.1% during August (16.3% y/y) after dropping 1.5% in July. Food at home prices rose 0.1% (2.7% y/y) during August after edging 0.1% higher during July. The cost of shelter rose 0.3% during August (3.0% y/y), after rising 0.1% during July. Excluding food and energy, the core CPI rose 0.3% during August after rising 0.2% during July. Over the past year the core CPI has risen 2.4%, the lowest since March 2021. (Source, U.S. Bureau of Labor Statistics)
- The University of Michigan reported that its Preliminary September Reading of Consumer Sentiment fell to 47.8 (-13.2% y/y) from a final August 51.7 as well as from a preliminary August 51.0. The preliminary September expectations component fell to 45.8 (-11.4% y/y) from a final August 51.5 and from a preliminary August 50.6. Lastly, the preliminary September current conditions component slid to 50.9 (-15.7% y/y) from a final August 51.9 and from a preliminary August 51.8. According to the Survey of Consumers Director, Joanne Hsu, “year-ahead inflation expectations jumped from 4.0% last month to 4.6% this month, the highest reading since June. The current reading substantially exceeds the 3.4% seen in February before the Iran conflict began, along with all 2024 readings.” (Source, Univ of Michigan)
- Prices at the wholesale level as measured by the Producer Price Index rose 0.4% during August, this after edging 0.1% higher during July. Over the past year the PPI has risen 5.4%, up from 4.7% in July. Energy prices rose 4.2% during August (24.4% y/y) after sliding 1.8% in July. Finished food prices rose 0.1% during August (0.1% y/y) after falling 0.9% in July. Excluding food, energy and trade, the core PPI rose 0.4% during August (5.1% y/y), after rising 0.2% in July. Prices for Intermediate Goods rose 1.8% during August (11.5% y/y) after falling 0.4% in July. (Source, U.S. Bureau of Labor Statistics)
- The Commerce Department reported that Wholesale Inventories rose 1.3% during July (5.7% y/y) after rising 1.3% in June. Wholesale Sales rose 0.8% (13.0% y/y) during July, after sliding 2.9% during June. Meanwhile, the Inventory-to-Sales Ratio declined to 1.20 months in July as compared to 1.19 months in June and versus 1.28 months one year prior. (Source, U.S. Census Bureau)
- Sales of Existing Homes fell 2.0% (-1.2% y/y) to a Seasonally Adjusted Annualized Rate (SAAR) of 3.98 million units during August from 4.06 million during July marking the lowest level since July 2025. According to the National Association of Realtors (NAR) total housing inventory at the end of July was 1.62 million units, up from 1.54 million units in July and by 5.6% y/y, the highest level since November 2019. Unsold inventory rose to 4.9 months during August from 4.6 months one month prior. The report also noted that the median price for all existing homes fell 1.7% (1.6% y/y) to $429,100 in August from $436,400. According to National Association of Realtors Chief Economist Lawrence Yun, “mortgage rates and home sales move in opposite directions, so it’s not surprising to see a mild dip in home buying activity due to high mortgage rates.” (Source, National Association of Realtors)
Economic Reports scheduled to be released this week, include the following – on Wednesday, August Retail Sales and July Business Inventories; on Thursday, August Housing Starts and the Initial Weekly Claims for Unemployment Benefits; and, on Friday, August Leading Economic Indicators, August Capacity Utilization and August Industrial Production.
Several potentially market moving companies are scheduled to report earnings, to include Progressive Corp (PGR), Pepsico (PEP), Helen of Troy (HELE), Delta Air Lines (DAL), Levi Strauss (LEVI), Lamb Weston(LW), Constellation Brands (STZ), Accenture (ACN) and Acuity (AYI).
