Summer slowdown

If you looked only at the subdued market volatility last week, you might never guess that a potentially significant regime change at the Federal Reserve is underway or that a disruptive conflict continues in the Middle East. Strong corporate earnings, a generally stable macroeconomic environment or just simply the late summer malaise may all be contributing. 

The main event last week was a rather uneventful inflation report. The Consumer Price Index landed roughly in line with expectations, calming fears for the time being. The headline number increased 3.4% year-over-year, largely from energy increases, while core inflation came in at 2.5% year-over-year. Trends were more mixed on the business side where the core Producer Price Index (PPI) increased 4.2% year-over-year, but down from the prior level of 4.7%. The US Treasury market let out a sigh of relief. Yields slipped, but the trend of above-target inflation and chorus of cautious Fed speakers has kept rates relatively elevated. In fact, the 30-year Treasury bond auction last week drew yields as high as 5.22%, marking the costliest borrowing level for the US government since 2001. 

Other economic data raised some modest concerns about consumer health. The latest University of Michigan sentiment index declined for the first time in three months, and core retail sales fell 0.40% month-over-month. The latter is much weaker than the expectations for modest growth. 

The inflation and consumer data together last week seemed to support a mildly softer inflationary environment, though it remains a long way from the Fed’s goal of 2%. Fortunately, policymakers will have another round of inflation and employment data to digest before its September meeting, for which the market has largely ruled out as delivering a rate hike.