Back In Business
Domestic stock benchmarks carved out another round of records on Friday to close out a good week, with a big assist from rallying telecommunication and bank shares, as Wall Street shook off North Korea’s latest missile launch. A great Monday, seen by many as something of a relief rally, set the tone for the week as multiple major benchmark indexes reached record highs multiple times. Monday’s burst of optimism came after the initial reports of damage from Hurricane Irma were not as severe as some pre-U.S. landfall estimates had projected. Stocks across the range of market capitalizations enjoyed similarly strong performance for the week.
Tech bellwether Apple announced the 10th anniversary version of the iPhone on Tuesday. Apple’s press event had little impact on the broader tech sector, and the company’s stock declined modestly on the day of the introduction before recovering to finish the week little changed. Apple shares had gained almost 40 percent in 2017 through the beginning of the week.
On Thursday, core inflation was up by a more than expected amount…and that got everyone talking. The Department of Commerce reported that the consumer price index (CPI) rose 0.4 percent in August, breaking a recent string of lower-than-expected monthly inflation readings. Most observers think that this solid CPI number supports the Federal Reserve’s view that the recent inflation soft patch was transitory. A rate hike at the Fed’s December policy meeting now seems to be roughly a 50:50 proposition. Higher interest rates last week (see below) supported bank stocks. Higher long-term interest rates allow banks to generate more interest income from lending, helping to boost their profits.
The inflation news got the market’s chattering class returned to that golden oldie, “the Fed is behind the curve.” They may be right, of course, but it may also be just a routine jolt higher to a measure that, overall, has been “surprising” economists for years.
Inflation may finally be getting back on track to reach the Federal Reserve’s goal, as the U.S. cost of living accelerated following a weak stretch of readings, Labor Department data showed Thursday.
The 0.2 percent rise in the core gauge ends a five-month streak of weaker-than-expected readings, and may soothe some concerns that inflation is slowing more broadly, though it will take more readings to determine whether the pickup can be sustained. The increase in the lodging category indicates the earlier decline in the sector was transitory.
Energy prices rose by the most since January and may reflect some impact from Hurricane Harvey. CPI data is collected throughout the month, and since the storm occurred in late August, the Bureau of Labor Statistics expects most of the data to come from before the storm, BLS economist Steve Reed said Wednesday. Data collection was disrupted in two of the 87 U.S. urban areas where prices are gathered.
As always, we cannot be anything close to sure. But it surely is too soon to making portfolio changes as a consequence.
U.S. Treasury yields increased last week, with much of the selling pressure coming at the beginning of the week as demand for safe-haven assets waned on North Korea and Hurricane Irma news. The strong August CPI report compounded the sell-off, particularly in shorter maturities that are more sensitive to increases in the federal funds rate, by boosting the odds that the Fed will raise rates at its December policy meeting. Prices of fed funds futures contracts at the end of last week showed that traders were pricing in an approximately 50 percent chance of a rate hike in December.
European equities ended last week higher too, as auto and tech stocks gained and favorable economic news provided a lift for key indexes. Eurozone statistics agency Eurostat reported that wages in the region rose 2 percent year-on-year in the second quarter, when the eurozone grew at its fastest pace in two years. Banks and mining stocks headed lower, reflecting some shifting by investors out of riskier assets into safer havens. On Friday, a morning rush hour explosion at a southwest London Underground station, labeled by police as a “terrorist incident,” dragged down travel and leisure stocks most notably, though a broad swath of sectors tumbled following the explosion.
The major Japanese stock market benchmarks posted solid gains last week. The widely watched Nikkei 225 was up 3.29 percent on the week. The yen closed the week at 110.66 versus the U.S. dollar, a gain of 2.54 percent against the prior week. However, the yen has declined 5.44 percent against the dollar YTD. Elsewhere in Asia, China’s latest batch of monthly indicators showed that the country’s economy unexpectedly slowed in August, offering more evidence that it has entered a slowdown after a sluggish July. Large cap Chinese stocks were still up a bit last week.