Baker Market Update – wk211001

Wake me up when September ends… it is officially the start of October. As we welcome a new month, let’s take a look at the economic and market happenings from this week.

This morning brought us the core personal consumption expenditures price index, which excludes food and energy costs and is the Federal Reserve’s preferred measure of inflation. The index increased 0.3% for the month and was up 3.6% from a year ago. The monthly gain was slightly higher than the 0.2% estimate. This new inflation data comes a couple of days after Fed Chairman Jerome Powell spoke at the European Central Bank forum where he called inflation “frustrating.” He also stated that U.S. inflation could be prolonged into early next year because parts and material shortages might be getting worse. However, he is sticking to his view that inflation will cool off in 2022 as shortages ease, but supply chain issues aren’t clearing up as quickly as he had hoped.

New consumer spending and income data was also released this morning. Personal spending rose 0.8% and income was up 0.2%. Personal spending was revised downward to -0.1% for the month of July signaling that the delta variant likely had some impact on the demand of good and services. Also, U.S. consumer sentiment edged upward in September as the University of Michigan Consumer Sentiment index was at 72.8 vs. 70.3 last month. Despite the rise in consumer sentiment in September, the index remains well below the 101.0 level registered before he pandemic in February 2020.

Yesterday, weekly jobless claims jumped 362,000, a two-month high, amid a large increase in California. New claims have fallen in most other states giving hope that the labor market is reasonably healthy despite the delta variant. Many of the people who recently lost some or all of their unemployment benefits are likely to rejoin the labor force in the coming months and should make it easier for companies to hire. A lack of labor is one of the bigger challenges for the economy to recover from COVID.

Equity and bonds markets had their fair share of volatility this week. The Dow Jones Industrial Average is down about 700 points from the start of this week, but up this morning, potentially snapping a 5-day losing streak. On Monday, investors were spooked by the potential government shutdown that was eventually avoided this week as Congress passed a bill to keep the government funding through early December.

The 10-Year Treasury Bond Yield reached a recent high of 1.56% earlier this week and is now trading lower at a yield of 1.49%. The 2-Year Treasury Yield saw a recent high of 0.31% earlier in the week and is now back down to 0.27%. Investors were concerned with a longer lasting rise in prices and the prospect of tighter monetary policy with the Federal Reserve signaling that a “moderation in the pace of asset purchases may soon be warranted.” During his press conference last week, Chairman Powell gave further details saying, “A drawdown of the central bank’s $120 billion in monthly bond purchases could begin after the November policy meeting as long as U.S. job growth through September is reasonable strong.”

Will job growth through September remain reasonably strong? We will find out next Friday as we get our monthly employment data including the number of nonfarm payrolls added in September, average hourly earnings, the unemployment rate, and labor force participation rate. Next Friday’s data is likely to have a big impact on the Federal Reserve decision on when to start tapering asset purchases.

I’m glad I woke up this morning when September ended in order to author this newsletter. Have a great weekend and as Lester would say, “Be Careful Out There!”

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For More Information

Dale Sheller

Senior Vice President
Financial Strategies Group
The Baker Group LP

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