Here’s The Asset Guidance Group Outlook for the Week Ahead… 

U.S. Economic News:

The number of Americans filing for first-time unemployment benefits fell for a fifth consecutive week last week, remaining near historic lows.  The Labor Department reported initial jobless claims fell by 5,000 to 213,000 in the week ending September 10.  They are now at the lowest level since June.  Economists had expected new claims to total 225,000.  Rubeela Farooqi, chief U.S economist for High Frequency Economics, wrote in a note, “These timely data continue to signal that demand for labor is still strong, with layoffs declining, even as the Fed is tightening aggressively.”  Meanwhile, the number of people already receiving benefits, known as “continuing claims”, rose by 2,000 to 1.4 million.  That number remains near a 50-year low.

Confidence among the nation’s small business owners rose last month as expectations over business conditions in the short-term improved and inflation concerns moderated.  The National Federation of Independent Business (NFIB), a small-business lobbying group, reported its Optimism Index rose 1.9 points to 91.8 in August.  The reading beat the consensus forecast of 90.5.  In the release, NFIB chief economist Bill Dunkelberg stated, “The small business economy is still recovering from the pandemic while inflation continues to be a serious problem for owners across the nation.”  August marks a second consecutive month of gains for the index, which nonetheless remains low compared to historical standards.  The overall improvement in confidence was driven by better prospects for short-term sales and the economy, improving from very depressed levels. The NFIB survey is a monthly snapshot of small businesses in the U.S., which account for nearly half of private sector jobs. 

Despite falling gas prices, inflation rose slightly last month, but it was the breadth of that rise that worried investors.  The Bureau of Labor Statistics reported its closely-watched Consumer Price Index (CPI) rose 0.1% in August.  The reading exceeded expectations for a 0.1% drop.  The small increase lowered the annual rate of inflation to 8.3% from 8.5%.  However, in a more worrisome sign, the “core rate” of inflation that omits food an energy prices rose a sharp 0.6%–double the prior month’s increase.  Wall Street had expected just a 0.3% gain.  The increase in the core rate over the past year jumped to 6.3% from 5.9% underscoring how much inflation has become embedded in the economy.  The Fed views the core rate as a more accurate measure of future inflation trends.  Given the increase, the Fed is now widely expected to hike interest rates at least (another) three-quarters of a percentage point at its next meeting September 20th and 21st.  

Costs at the wholesale level ticked down in August, largely due to cheaper gasoline.  The Producer Price Index fell 0.1% last month, matching expectations and its first back-to-back drop since early 2020 when the pandemic began.  On an annual basis, the increase in wholesale prices slowed to 8.7% from 9.8% in the prior month.  However, like the consumer price index, omitting food and energy showed a 0.2% rise in core wholesale prices.  That was higher than expected.  Despite months of analysts and Fed officials stating inflation was “transitory”, almost everyone now agrees that inflation is pervasive and embedded and won’t be easy to eradicate.

Sales at the nation’s retailers rose a mild 0.3% in August as Americans spent more on new vehicles and eating out at restaurants.  The reading suggests the economy grew at a steady (yet lackluster) pace toward the end of summer.  However, analysts note that the amount of money Americans are spending largely reflects the higher prices being paid due to soaring inflation.  Adjusted for inflation, retail spending has basically been flat for the past year.  Now with summer in the rearview mirror and a Federal Reserve that is hiking interest rates, analysts are concerned consumers will be forced to cut their spending over the coming months.  Economists at Oxford Economics wrote in a note, “Consumers continue to show resilience in the face of elevated inflation, and lower prices at the pump are a welcome relief.  But the outlook in coming quarters is less favorable.”

Two regional gauges of manufacturing activity signaled contraction in September, according to data released this week.  The Philadelphia Federal Reserve reported its manufacturing index slowed to -9.9 this month, down from 6.2 in the prior month.  Economists had expected a reading of 2.3.  In New York, the NY Fed’s Empire State Index managed a rebound to -1.5 from -31.3 but remained in contraction.  Economists were expecting a reading of -13.8.  In key subcomponents in the Philadelphia survey, new orders fell to -17.6 in September from -5.1 in the previous month.  Shipments in Philadelphia fell to 8.8 from 24.8 in August.  New orders in the New York region rebounded 33.3 points to 3.7 in September.  Shipments soared 43.7 points to 19.6 in the region.  The two regional Fed surveys are used by economists to gauge the strength of the national ISM factory index, which will be released the first week of October. [1]

Random Thought/Image of the Week

Analyst Wolf Richter at wolfstreet.com did a deep dive into the details of this week’s inflation report and what he found wasn’t pretty.  While the headline CPI and even the core CPI weren’t worse than expected, Richter found that the CPI for ‘services’ was a “nightmare”, which “spiked relentlessly” to its highest increase since October of 1982.  Services make up the vast majority of the U.S. economy and are now the main driver of inflation.  A part of CPI is the large “food at home” category, which spiked to its worst level since February of 1979 at 13.5%.  Food inflation is particularly worrisome because it hits low and middle-income households the most since they spend a relatively bigger part of their budgets on food. (Chart from wolfstreet.com).

Structured Note Values

1. XLE/XOP Lowest, XLE Pricing Value 3/25/22: 78.75, Current: 78.44, Delta -0.39%; XOP Pricing Value 3/25/22: 138.60, Current Value: 137.22, Delta -1.00%
2. Lower of GDX/GDXJ; GDX Pricing Value: 4/29/22: 34.99, Current: 24.00; Delta -31.41%; GDXJ Pricing Value 4/29/22: 42.95, Current: 29.29 Delta -31.80%
3. Lower of GDX/GDXJ; GDX Pricing Value: 5/26/22: 32.39, Current: 24.00 Delta -25.90%; GDXJ Pricing Value 5/26/22: 39.67, Current: 29.29, Delta -26.17%
4. ARKK Pricing Value 6/15/22: 39.42, Current: 42.58, Delta +8.02%
5. ARKK Pricing Value 7/15/22: 44.11, Current: 42.58, Delta -3.47%
6. SPX Pricing Value 7/18/22: 3863.16, Current 3873.33, Delta +0.26%
7. RTY Pricing Value 7/18/22: 1744.37, Current: 1798.06, Delta +3.08%
8. NDX Pricing Value 7/18/22: 11,452.42, Current: 11,448.40, Delta -0.04% [4]

The Week Ahead

While three central bank interest rate decisions await this week, global investors will
focus squarely on Wednesday’s FOMC meeting. Amid last  week’s rumors of a 100bps
hike, traders are pricing in 75bps and indications that further substantial increases
are coming. Yes, annual inflation did decrease from 8.5% to 8.3% last month, but it
remains miles away from the Fed’s intended 2% target.  While supply chain disinflation
is finally emerging, the U.S. labor market is still far too tight to bring demand growth
and thus inflationary pressures down quickly enough. After delaying its decision by a week, the Bank of England is expected to raise by 50bps but may consider more after prime minister Truss announced a supportive package to cap household energy bills. The Bank of Japan may be considering a policy shift after conducting a rate check last week, which is widely interpreted as a potential currency intervention to prop up the sinking yen. But experts see raising the cap on 10-year government bond yields more likely than the BOJ raising short-term rates, as inflation still hovers near just 2.5%. The other main event this week is Friday’s global PMIs, with updates on supply and demand conditions for the manufacturing and services sectors amid recession concerns. Other releases of note include U.S. housing starts and existing home sales, Canada’s August CPI, and EU consumer confidence. [2]

Chart of the Week: 2-Yr Bond Prices Tumble

Bonds had a major reaction to the hotter than expected CPI numbers. The 2-Year U.S. Treasury Note Futures (/ZT), which move inversely to yield, clearly broke through an important potential support level at the June lows, sending yields to levels not seen since 2007. Prior levels of demand often may become supply zones, working as price resistance with the potential for continuing downtrends. With the FOMC policy  statement and economic projection due for release Wednesday, the area near 103’24 may be one to watch
for short-term rates. Click on the Chart to Enlarge. [3]

Sources: [1] Asset Guidance Group analysis, www.stockcharts.com; All index- and returns-data from Yahoo Finance; news from Reuters, Barron’s, Wall St. Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat,0020Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; [2] Data & chart from thehustle.com; [3] tdainstitutional.com; [4] stockcharts.com. 

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