Weekly Market Update: September 18, 2023

The latest price and labor data did not change the narrative about the Federal Reserve’s likely near-term monetary policy course. The consensus view is that the central bank will keep the federal funds rate higher, and for a longer period, in an attempt to effectively fight inflation. This thinking has pushed Treasury market yields higher.

The August Consumer Price Index (CPI) made for a mixed reading. The CPI rose 0.6%, month to month, and 3.7% on a one-year basis. These figures were above the July rates and reflect, in large part, the jump in energy prices. The core CPI, which excludes food and energy, climbed 0.3% and 4.3%, respectively. The Fed was likely encouraged by the moderation in the 12-month core-CPI figure, but the month-to-month acceleration is a big reason why we think the central bank won’t alter its monetary policy course until well into 2024.

Labor market statistics have kept the hopes of a “soft landing” for the economy in place. The better-than-expected 187,000 increase in August nonfarm payroll positions and recent benign initial jobless claims figures are typically not indicative of an economy heading into recession. From the Fed’s perspective, it had to like the uptick in the August unemployment rate, the increase in the labor force participation rate, and the drop in the Job Openings and Labor Turnover Survey. Those data points suggest that more people will be looking for a job as openings decrease, likely putting downward pressure on wage inflation.

We still think the economy will need the consumer to contribute at a pace similar to what we are currently seeing if a mild recession is to be avoided. This is where it gets a little murky, as savings accounts have shrunk, credit card balances have ballooned, and many individuals will soon have to begin paying off student debt obligations. This is likely to place stress on household budgets heading into 2024.

Conclusion: The equity market is dealing with some headwinds (i.e., inflation, Fed policy, and a looming debt ceiling battle on Capitol Hill) during a time of year that has often not been kind to stocks. In this environment, we still recommend a portfolio consisting of mostly high-quality companies. 

Source: ValueLine.com