S&P 500: -0.31% DOW: 0.62% NASDAQ: -1.90% 10-YR: 4.17%
Last Week on WallStreet - August 12th, 2023
Both the S&P 500 and Nasdaq Composite etched their second consecutive week of losses - the first such instance in 2023 for the Nasdaq. The two inflation readings released this week, CPI and PPI, painted a mixed picture on the outlook of prices. While the CPI continued to improve, data under the surface indicated some stickiness, and the PPI report appeared to elevate the risk of a potential re-acceleration in prices. Markets may have escaped unscathed from similar data points earlier in the year, but now that the bears seem to be driving sentiment on Wall Street, investors have less tolerance for deviations in data and a lower risk appetite overall. This culminated in the underperformance of some of this year's big winners, such as Nvidia and Applied Materials.
Beneath the surface, the incoming data and negative sentiment in markets led to intense divergence in sector performance. Energy (3.4%) continued its recent run on the back of higher oil prices and Healthcare (2.5%) names performed well as investors flocked to safer pastures. Meanwhile, the darling Technology (2.5%) stocks of this year lagged behind the pack.
July CPI Report Shows Inflation Guage Rose 3.2%, Less Than Expected
- The consumer price index rose 0.2% in July, 3.2% from a year ago coming in slightly below expectations.
- core CPI also increased 0.2% for the month, matching the estimate and equating to a 12-month rate of 4.7%
- Almost all of the monthly inflation increase came from shelter costs, which rose 0.4% and were up 7.7% from a year ago
- Real wages adjusted for inflation increased 0.3% on the month and were up 1.1% from a year ago
The key takeaway - The pace of inflation has materially decelerated since the four-plus decade highs experienced a year ago. Despite a slight uptick this month, the general trajectory has been positive but is likely to be bumpy from here. While the progress is certainly encouraging, it's important to note that inflation remains notably higher than the target set by the Federal Reserve. Reducing inflation from 3% down to 2% will likely be more challenging than the progress so far and some worry of a re-acceleration in prices. Nonetheless, this reading aligning with expectations alleviates some pressure on the Fed to make any drastically hawkish decisions. This situation allows the Fed to adopt a more nuanced and deliberate approach when weighing the pros and cons of hikes going forward.
China's Trade Slumps, Threatening Recovery Prospects
- Imports dropped 12.4% in July year-on-year, missing a forecast fall of 5% on the back of a 6.8% decline in June
- Exports contracted 14.5%, steeper than an expected 12.5% decline and the previous month's 12.4% fall
- The fastest pace of decline since early in the pandemic
- The yuan hit a three-week low following the news
The key takeaway - Contrary to expectations of an explosive recovery following the conclusion of zero-covid policy in China, the Chinese economy appears to be stagnating due to a convergence of factors, including the slow international trade data found in this report. The exporting of goods encompasses an incredibly significant part of the Chinese economy and the drying up of global demand for said goods, especially in the US, has dealt a large blow to activity. Exports to the US and EU have fallen over 20% from a year ago and consumption data from both economic regions suggest that trend could continue. This worrisome data combined with reports of deceleration in construction activity, industrial profits, and other economic indicators signal the Chinese economy is likely headed for more hardship, applying additional pressure on the government to provide stimulus.
US Wholesale Prices Surprise to the Upside in July, PPI Shows
- The U.S. producer price index rose 0.3% in July, up from a revised flat reading in June and the largest gain since January
- The core producer price index, which excludes volatile food, energy prices, and trade services rose 0.2 in July, up from a 0.1% gain in the prior month
- Over the past year, headline producer price inflation was running at a 0.8% rate in July
- The cost of services rose 0.5% last month, up from a 0.1% drop in June and the largest increase in a year
The key takeaway - Inflationary pressures in the producer economy have moderated at a swifter pace than CPI since reaching its peak last year. However, the latest report shows a departure from that trend in July as prices rose more than in the previous month and surpassed economists' expectations. Ideally, this is a one-off uptick in the data over the summer, but if the declining trend stagnates or reverses into higher prices for producers, there will likely be a flow-through effect on consumers as companies attempt to maintain their margins. This is especially true in the services sector, which was the majority of the move higher in this reading, as robust demand for services in the economy will allow companies to transfer these costs more easily.
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