Market Perspective for September 11, 2022

The major market indexes broke a three-week losing streak with nice gains. Friday was a good day for the markets as the Dow Jones Industrial Average gained 377 points or 1.19 percent, the S&P 500 climbed 1.53 percent, and the Nasdaq composite gained 2.11 percent.

For the week, the Dow Jones Industrial Average rose 2.66 percent, the S&P 500 gained 3.65 percent, and the Nasdaq jumped 4.14 percent. These gains came in spite of the expected Federal Reserve rate hike later this month.

A good earnings report and third-quarter guidance above expectations from DocuSign caused the stock to surge more than 10 percent. Another good earnings report and good third-quarter guidance from Kroger also helped the market gain later in the week.

On Thursday, Federal Reserve Chairman once again reiterated just how important it is to get rid of this current inflation before the public becomes too used to these high prices and starts expecting them as normal.

During his recent comments, Powell said that expectations play an important role and were the main reason why inflation was so persistent in the 1970s and 1980s. Chairman Powell seems to have learned from past mistakes.

“History cautions strongly against prematurely loosening policy, and I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done,” Powell said at a question and answer session presented by the Cato Institute.

This was Powell’s last scheduled appearance until next week’s Federal Reserve meeting on September 20-21. The markets are now anticipating and pricing in a 0.75 percent rate hike, which will put the Fed rate set range between 3 percent and 3.25 percent.

The stock markets didn’t seem troubled by the hawkish comments, but the two-year Treasury yield jumped nearly five basis points to 3.49 percent.

There have been a few signs that inflation is easing in some areas like gasoline, which has been dropping steadily since topping $5 per gallon earlier this year. But other areas, especially housing, have remained stubbornly high.

Other reasons for this inflation are still related to the pandemic and supply and demand issues. During the pandemic, while Americans were getting stimulus checks and other extra benefits, savings hit some of the best levels in years. Once the pandemic eased, Americans were able to get out and use those savings to buy products and services, some of which are still in short supply.

On Tuesday morning, September 13, the Bureau of Labor Statistics will release the consumer price index (CPI) for August and give the Federal Reserve and the rest of us an idea of how the fight against inflation is working.

Economists expect a 0.2 percent increase in the headline CPI after coming in flat for July. The year-over-year increase for July was 8.5 percent.

Powell also commented on how robust the labor market has been and that it is maintaining strong hiring levels despite the interest rate increases.

“What we hope to achieve is a period of growth below trend, which will cause the labor market to get back into better balance, and that will bring wages back down to levels that are more consistent with 2 percent inflation over time,” commented Powell.

Federal Reserve Vice Chairman Lael Brainard also vowed to continue the fight against inflation and said that rates will continue to increase and will stay higher for longer. But she also said that the Federal Reserve is aware of overdoing tightening, and decisions will continue to be dependent on the data.

Despite rising interest rates and the fear of a recession, the labor market continues to be strong with no signs of weakening. Last week, the number of first-time unemployment benefit claims fell by 6,000 to 222,000.

The initial weekly claims figure was lower than economists’ expectations of 240,000 and has stayed at its lowest level for over three months.

The demand for mortgages continues to fall as mortgage applications dropped 1 percent and are now 23 percent lower than the same week one year ago. According to Mortgage News Daily, the average for a 30-year fixed rate mortgage was at 5.97 percent last Friday, which is 3.02 percent higher than a year ago. On Monday, September 6, the 30-year fixed rate mortgage spiked to 6.25 percent

This week, all eyes will be on the consumer price index, which will be released before the bell on Tuesday morning at 8:30 am EDT.

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