Markets doing loop-de-loops

The roller coaster ride continued last week, as both equity and bond markets ended the week nearly unchanged, but not before experiencing considerable volatility. War continues to rage abroad, but markets are able to shrug off unsettling news. That is, until they can’t, which usually leads to the topsy-turvy moves in prices and yields. 

Data continues to point to a slowing economy, but not so fast as to cause undue alarm. Case in point: weekly jobless claims are about 10% higher over the last month, but remain well below longer-term averages. Mortgage applications rose 2.5% in the last week, but that’s off multi-decade lows, and in the face of very high mortgage rates. The Federal Reserve’s Senior Loan Officer Opinion Survey indicated that officers continue to get more stingy with credit, raising standards, but they are also seeing less demand for credit. 

The University of Michigan Consumer Sentiment index showed that consumers are growing more cautious. Even though their current and expected finances improved modestly, consumers are wary of inflation, as their year-ahead expectations rose to 4.4%, the third consecutive monthly increase and the highest since last November. Perhaps more troubling was that their long-term inflation expectations rose from 3.0% to 3.2%, not very much, but this is the highest reading since 2011. Oddly enough, gasoline price expectations, both short- and long-term, rose to their highest readings this year, even as per-gallon national gasoline prices have fallen steadily since mid-September, from $4.00 to $3.52.

A cautious consumer heading into the Christmas shopping season probably ensures that fourth quarter GDP will fall from the torrid pace in the third quarter. It doesn’t seem like markets will calm any time soon, especially as they await next week’s consumer price index report to help guide Federal Reserve policy expectations.