Stocks and Bonds Slide on Inflation Worries and Likely Fed Rate Hike

Good morning,

In a holiday-shortened week, the Dow (-1.6%), NASDAQ (-0.8%), S&P 500 (-0.8%), and EAFE (-1.4%) were all down.  Similarly, taxable bonds and tax-free municipal bonds were also down sharply, losing 1.0% and 1.2%, respectively.  The 10-year Treasury yield increased 0.19% to finish the week at 4.97%, just under the 5% milestone.

Oil (and gasoline) prices and their resulting impact on inflation are capturing the headlines, as the conflict in the Middle East is showing no signs of end soon.  The Consumer Price Index (CPI – the most commonly known measure of inflation) came in at 3.4% in August, while core CPI (excluding food and energy) was up 2.4%.  The Producer Price Index (PPI) rose 5.4%, with core PPI rising 4.6%.  While those inflation reading were in line with economists’ expectations, they are still considerably higher than the prior month, and well above the Fed’s target inflation of 2%.  As a result, it is now widely expected that the Fed will raise interest rates at the conclusion of its meeting on Wednesday.

On a more positive note, corporate earnings and economic growth continue to remain solid.  Further, a broadening of the stock market is also very healthy, which should help the uptrend of the markets continue.  Broadening of the market means that the gains are being seen by more than just a handful of names, which has been the case for the past few years, when just a few AI companies led the way.  On that note, there seems to be some pressure on those stocks today, as a couple leaders in AI development expressed their concerns over the weekend of the risks associated with AI.  That will command the headlines today, and likely drive the AI-related stocks down …. at least for now.

Have a great day and terrific week!

^{Source:  Yahoo Finance}

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