We noted last week that there was “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.” Although the S&P 500 along with the NASDAQ Composite did rise post hike (see immediately below), it is much too early to claim victory. In fact, we will be closely watching the direction of Treasury Rates as well as the strength of the labor market over the coming weeks to get a better indication of what might be the Fed’s next move.
- Stating that inflation is still too high, the Open Market Committee of the Federal Reserve (FOMC) raised its benchmark Federal Funds Rate by 0.25% to a target range of 3.75% to 4.00%. Warsh along with the other members of the FOMC are concerned that elevated oil prices may broaden out into other areas of the economy. The Fed Chair stated that although they “cannot affect any individual price,” but “what we can do and will do is ensure that any change in relative prices don’t broaden out, don’t have second and third order effects on the economy.” President Trump responded on Truth Social that “interest rates in the United States should be 1%, or less, because we are the Best Credit in the World – BY FAR.” Although one could debate the merits of the last move by the Fed, rates much lower than where they are now would, in our opinion, spark serious, detrimental inflation. At this time, the financial markets think the Fed is “one and done” as interest rates came down after the announcement by the Fed. Time will tell. Should this war drag on, that sentiment may be wishful thinking. The following represents the actual statement:
“The Federal Open Market Committee approved the following statement for release by a 12-0 vote:The Committee decided to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent, in support of the Federal Reserve's dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.
- Economic activity is expanding at a solid pace. While uncertainty remains elevated owing, in part, to geopolitical developments, domestic spending has been resilient. Productivity growth is strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability.”
- Noting that “father time always wins,” legendary Berkshire Hathaway former Chief Executive Officer (CEO) and current Chairman, Warren Buffett has decided to step down. The 96-year old Buffett added that (father time), “he has, however, been generous with me. He has given me the opportunity to see Berkshire reach a point where I am more confident than ever about what lies ahead.” We should all be as gracious as Buffett. Despite remaining extremely wealthy, Buffett and his wife have given away more than $72 billion over their lifetimes.
- Elon Musk, OpenAI CEO Sam Altman and Anthropic CEO Dario Amodei have all stated independently that they believe the development in Artificial Intelligence (AI) may be moving too fast. As reported by CNBC, Amodei has proposed that would grant “third-party evaluators employee-level access to the company to verify safety practices and report incidents. The second step encourages leading AI companies within democratic countries to coordinate and establish common safety standards, and the third calls for coordination between democratic governments and authoritarian governments.” Musk and Altman support this. Amodei wrote that “to be clear, pacing does not mean halting model training or technical progress, but ensuring companies take adequate time to align and safeguard their models, and for third party evaluators to confirm this.” Unlike how the development of the internet has been unfortunately left basically ungoverned, this promising, potentially civilization altering technology needs strict oversight.
Economic Data That Drove Market Sentiment This Past Week…
- The Conference Board reported that its U.S. Index of Leading Economic Indicators edged 0.1% lower during August, after rising 0.2% in July. The US LEI has slid 0.1% over the trailing six months, a substantial improvement from the 0.6% drop over the previous six months. According to Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators at The Conference Board, “the US LEI reduced slightly in August, the first decline of March of this year. Four out of ten components fell compared to the previous month, with consumer expectations remaining a significant strain on the index.” (Source, The Conference Board)
- Industrial Production, a measure of strength in the manufacturing, factory and utility sectors, rose 0.0% during August (1.4% y/y), after rising 0.2% during July. Capacity Utilization held steady at 76.3% during August when compared to July, but has improved from 76.1% y/y. Manufacturing Capacity fell to 75.7% from 76.0% m/m and as compared to 75.9% y/y. (Source, U.S. Federal Reserve)
- Housing Starts fell 2.6% or by 34,000 to a seasonally adjusted annualized rate (SAAR) of 1,275,000 during August from 1,309,000 in July (-1.2% y/y). A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units built annually to account for household growth and to replace existing stock. During July, Single-family housing starts rose 7.6% or 65,000 to 918,000 (5.2% y/y). Meanwhile, Multifamily housing starts fell 22.5% to 344,000 in August (-15.5% y/y) from 444,000 during July. Building Permits, a key barometer for future starts, fell 39,000 to 1,394,000 in August as compared to 1,433,000 during July (3.5% y/y). (Source, U.S. Census Bureau)
- Retail Sales jumped 1.2% in August (6.0% y/y), after sliding 0.5% in July. Spending on Motor Vehicle & Parts rose 0.6% during August (2.1% y/y) after falling 1.8% in July. Retail Sales Excluding Motor Vehicles & Parts rose 1.4% during August (6.9% y/y), after falling 0.2% during July. Two key components of this report, Sales at Gasoline Stations jumped 3.1% during August (21.0% y/y) after falling 0.2% in July as Food Services and Drinking Place Sales rose 1.2% during August (5.8% y/y) after rising 0.5% in July. Also of note was the 1.6% rebound in sales at electronic & appliance stores (7.8% y/y) as well as the 0.7% jump (4.3% y/y) in sales at clothing and accessory stores. (Source, U.S. Census Bureau)
- U.S. Export Prices rose 0.6% during August (8.6% y/y) after slipping 1.4% in July. Import prices rose 0.7% during August (7.0% y/y) after falling 0.3% in July. Agricultural export prices rose 0.5% during August (5.8% y/y), after edging 0.4% higher during July. Non-Agricultural Export Prices rose 0.7% during August (8.9% y/y) after falling 1.6% during July. Please note that import and export prices are not affected by tariffs as they are measured prior to taxes. (Source, U.S. Bureau of Labor Statistics)
Economic Reports scheduled to be released this week, include the following – on Thursday, August New Home Sales as well as the Initial Weekly Claims for Unemployment Benefits; and, on Friday, August Orders for Durable Goods and the final September Report on Consumer Sentiment from the University of Michigan.
Several potentially market moving companies are scheduled to report earnings, to include Commercial Metals (CMC), CSX Corp (CSX), Iridium Communications (IRDM), Freeport McMoran (FCX), Autozone (AZO), General Mills (GIS), Paychex (PAYX) and Costco Wholesale (COST).
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Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
