Stocks Down & Bonds Slammed on Inflation Data

Good morning!

The Dow (-1.8%), NASDAQ (+0.3%), and S&P 500 (-0.6%) were broadly lower for the week, despite the rise in the NASDAQ index.  Two large tech stocks – Tesla (+12.2%) and Google (+8.7%) – rose sharply, propelling the NASDAQ index to finish in positive territory.  Meanwhile, taxable bonds got whipped last week, losing 1.4%, and tax-free municipal bonds also fell 0.9%.  Due to bonds losing value, the 10-year Treasury yield rose sharply, gaining 0.25% to end the week at 4.40%.

Two inflation gauges were reported last week – Consumer Price Index (CPI) and Producer Price Index (PPI).  The CPI rose 0.3% over the prior month, which was the largest monthly increase since April, but also met investors’ expectations.  PPI also rose a larger-than-expected 0.4% over the prior month, higher than the 0.2% expected.  These inflationary measures are demonstrating that inflation has been ticking back up over the past few months, following a decreasing trend over the past 2+ years.  This adversely impacted bond values, causing their yield to move up sharply for the week.

All eyes will be on the Fed this week, as there is now a 96% probability that it cuts interest rates by 0.25% on Wednesday.  The increased likelihood of a Fed rate cut seems counter intuitive, given the increase in inflationary measures reported last week.  In addition, the Fed will also be reporting its “dot-plot”, which illustrates the anticipated future rate cuts by each of its members.  Leading Economic Indicators (LEIs) and the Fed-favored inflation report – Personal Consumption Expenditures (PCE) – will also be reported later in the week.  Unless there is something significantly unexpected, it does not appear that it will drive markets sharply in one direction or another.  After this week, we enter the holiday season and many Wall Street investors will be away until the new year.

Have a great day and terrific week!

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