Stocks Mixed and Bonds Down on Inflation Reports

The Dow (+0.1%), NASDAQ (-0.4%), and S&P 500 (-0.1%) produced mixed results for the week.  Meanwhile, taxable bonds were down about 0.3% and tax-free municipal bonds were down 0.1%.  The recent slippage in the bond market has now caused bonds to be near or below their starting point for this year.  The 10-year Treasury yield jumped about 0.07% to close the week at 4.33%, the highest yield since 2008.

Inflation and retail sales data dominated the economic headlines last week, and they all have an impact on the Fed’s decision to raise, lower, or keep interest rates the same.  The Consumer Price Index (CPI, a leading measure of inflation) was reported for August and showed that inflation is rising again, as it rose from 3.2% to 3.7%.  Excluding the volatile energy and food components, core inflation rose 4.2%, down from 4.7% the prior month.  The rise in inflation is due in great part to the rise in oil (and gas) prices in August.  This increase may be ignored by many investors, unless if it persists and could become a bigger impact to inflationary pressures.  Retail sales also rose a surprisingly high 0.6% over the prior month, but when excluding autos and gas, the rise was only 0.2%, and that excluded inflation.

This week, the Fed will announce if they will raise interest rates in its effort to combat inflation.  Most investors expect the Fed to keep rates unchanged, so any action will come as a huge surprise, which will be met with a swift reaction by the stock and bond markets.  Leading Economic Indicators (LEIs) will also be released later this week, which will be interesting to see.  We have another 4 weeks until the next corporate earnings season begins, so this tends to be the time in which companies will raise or lower their expectations, and they tend to solicit a greater response than the actual earnings.

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