August 17, 2024 Market Update

The S&P 500 ended its four-week losing streak at the close on Friday, with all three major indexes posting their best week since November of last year.  Positive inflation readings along with strong retail sales and consumer sentiment reports alleviated worries about a slowing labor market.

The bond market remained relatively calm this past week with the 10-year treasury yields dropping by a modest 5 bps.  The Vanguard Total Bond Market ETF (BND), a proxy for investment-grade corporate and government fixed-income securities, rose 0.54% over the course of the week.

Has the Federal Reserve succeeded in bringing inflation under control?  Based on the data released last week, the answer appears to be yes.

The Producer Price Index (PPI), an economic indicator that tracks changes in what producers are paid for their goods and services, rose by a less-than-expected 0.1% in July compared to June.  The PPI’s annual increase of 2.2% was the smallest year-over-year rise since March.

The Consumer Price Index (CPI), a broad-based measure of what consumers pay for goods and services, increased by just 0.2% for the month.  This puts the 12-month inflation rate at 2.9%, the lowest this metric has been since March 2021.  Core CPI, which excludes food and energy expenditures, also rose by 0.2% in July, with a 3.2% annual increase, also a three-year low.

The encouraging inflation data, combined with a surge in the unemployment rate to a near three-year high of 4.3%, is the kind of information the Fed has indicated it was waiting for to begin lowering interest rates.  Moreover, because the economy is still growing, albeit at a slower pace, Fed officials are in a position to maintain their cautious and data-driven approach to cutting interest rates, rather than accelerate rate cuts as many commentators have called for.

The Fed's most recent projection indicates that they anticipate three quarter point rate cuts in 2024, which would reduce the federal funds rate to 4.5% - 4.75% by years end. 

That’s all for now.  Have a great weekend and invest wisely my friends.