Wentz Weekly Insights
Hot Inflation Pushes Rate Expectations Higher and FedEx’s Warning Increases Recession Fears

It was another down week for stocks as investors digested another hotter than expected inflation reading for August and a terrible earnings miss from FedEx and commentary that suggested the global economy may be slowing sooner and faster than previously expected. Wednesday will be an important day this week in determining how the Fed will balance between a slowing economy and higher inflation.

Most of the selling came Tuesday after the Bureau of Labor Statistics released the latest inflation data for August. The consumer price index (CPI) rose 0.1% in the month, which is not a high reading and would be less than the 2% (on an annualized pace) that the Fed is targeting. However, the expectation was for a slight decline. More importantly, after digging through the detail of the report, inflation was more widespread and higher than the headline suggested. The lower reading was due purely to a drop in energy prices for the second consecutive month. If we exclude the volatile energy and food categories, the index was up 0.6%, double expectations. The rise was because of large price increases in categories that tend to be “sticky” – those are items where price increases tend to be more persistent and difficult to bring down, such as shelter and medical. In fact, every category, with the exception of energy and used cars, saw an increase in August. Compared to a year ago, the core index is 6.3% higher which was above the 6.1% expected.

After the release stocks moved substantially lower, finishing down over 4% for the day, while Treasury yields moved higher across the curve as investors began pricing in a higher Federal Funds rate. Fed funds futures, which is where markets see interest rates in the future, priced in an 80% chance the Fed will raise rates 75 basis points at its next meeting this Wednesday and a 20% chance they would go a higher 100 basis points (one basis point equals one hundredth of a one percent). It was just a little over a week ago that futures markets were pricing the Fed would only increase rates half of a percent. The expectation of higher rates is being felt in the bond market as the short-end of the yield curve moved substantially higher with the 2-year Treasury note yielding 3.86%, the highest since 2007.

If that wasn’t enough, FedEx preannounced its quarterly earnings results Thursday after the close that were considerably below expectations while cutting its forecast for the current quarter and withdrawing its guidance for the full year. It wasn’t necessarily the miss that made investors worry, but commentary about the global economy. Management said the miss was due to challenges in Europe and other areas as well as global volume weakness which accelerated in the final weeks of the quarter, raising a red flag for investors. One company typically does not have a big affect on the market, but FedEx is considered a bellwether due to its global exposure and business it does in shipping products around the world. Costs was another issues with the company taking several steps to address that including closing more than 90 locations, slowing hiring, consolidating some operations, reduce flights, and temporarily park some aircraft. Markets spent Friday figuring out if this was a company specific issue or a sign of things to come for the economy, sending both the stock and broader market lower for the day.

That moves us to this week with the Fed meeting and these two issues of hotter inflation and a slowing economy makes the Federal Reserve and Chairman Powell’s task more difficult. While a 75 bps move at the meeting this week is all but certain, the bigger question is what the summary of economic projections show where the Fed will be done raising rates (referred to as the “dot plot”). Powell and other Fed policymakers have indicated they see that being around 4.00%, but after the recent data market participants are starting to expect that rate will need to go higher to cool inflation.

We expect it to continue to be a bumpy ride.

Week in Review:

Last week started out on a quiet note, with no market moving headlines and stocks trading higher overall on the lack of headlines, following through on a positive week the week prior. The monthly New York Fed survey showed a drop in inflation expectations over the short-term and longer-term, helping move stocks higher in afternoon trading, in addition to rumors Beijing would provide additional support for its economy. The NASDAQ gained 1.27% while the S&P 500 finished up 1.06%.

Tuesday morning started off with the highly anticipated consumer price index (CPI) report for August that showed a surprise increase in inflation in the month and a higher year-over-year pace than expected, sending stocks significantly lower and yields much higher, particularly on the short-end as the markets expectations inked in a 75 bps increase at the next Fed meeting, and even began pricing in a large 100 bps increase. The dollar had its best day since March 2020 while stocks had their worst day since June 2020 with value outperforming growth by almost 2% as the Dow fell 3.94% while the NASDAQ fell 5.16% and the S&P 500 down 4.32%.

Markets attempted a rebound on Wednesday, opening relatively flat but very mixed on light news headlines. Data in the morning showed the producer price index fell for the second consecutive month, but almost all due to a drop in energy prices again, while focus continues to be on the hotter than expected CPI and how that impacts the Fed’s decision. China provided a bit of support over reports it is on track to relax Covid lockdown restrictions in Chengdu. The S&P 500 gained 0.34% on the day.

Thursday morning was met with an agreement being made between rail workers union and labor negotiators that averted a railroad strike in the U.S. Economic data released included another drop in jobless claims, manufacturing conditions that were very mixed, and retail sales that were slightly better than expected but mostly due to a bounce in vehicle sales. The solid economic data turned out to be a ‘good news is bad news’ event that led stocks lower over the expectation the Fed may push rates higher than previously expected. The S&P 500 broke below a key support level of 3,900 but closed just above that and finished down 1.13% for the day.

Stocks fell again on Friday on a substantially higher volume day due to several major index options expiring. The main headline was FedEx preannouncing its earnings results which included a huge disappointment on last quarters results and a sharp downward revision to its earnings for the current quarter and pulled its full year guidance. The company noted operational challenges along with global volume weakness that accelerated in the past few weeks which contributed to the market decline over recession worries. Small caps struggled the most with the Russell 2000 down 1.48% while the S&P 500 fell 0.72%.

It was mostly risk-off mode for the week for investors. Oil finished lower by 1.9% for its third straight week of declines. The dollar has seen increased attention on its recent strength after it hit a 20-year high last week. Bonds sold off more as yields rose along the curve with the short-end seeing the largest increase over expectation Fed will hike rates further than previously expected. For the week the major U.S. stock indices finished as follows: Dow -4.13%, Russell 2000 -4.50%, S&P 500 -4.77%, NASDAQ -5.48%.

Recent Economic Data

  • The New York Fed’s survey of consumer expectations for August showed consumers’ expectations on inflation declined over the past month. The median one-year ahead inflation expectation fell to 5.7% from 6.2% while the three-year inflation expectation fell to 2.8% from 3.2%, however there was a wider expectation due to the uncertain trajectory of inflation. The expectation for home price gains declined sharply with the median expectation at 2.1%, down from 3.5% in July and the lowest since pre-pandemic. The median expectation on earnings growth rose 0.1% to 3.5% for a new series high.
  • The consumer price index rose 0.1% in August after being unchanged in July. The consensus expectation was a 0.1% decline in the month. Compared to a year ago, the index was 8.3% higher, down from the 8.5% rate in July but still higher than the 8.1% expected. While it is lower than the 9.1% peak in June, it is still quadruple the Fed’s target of 2.0%. The index was expected to be negative in the month because of a sharp drop in energy prices – energy prices fell 5.0% in the month including a 10.6% drop in gas prices, however are still 25.6% higher than a year ago. The price of goods/services that are the most “sticky” are what drove the index higher – things like shelter, food, and medical care. Excluding food and energy, the “core” index was up 0.6% in the month, double the expectation, and up 6.3% from a year ago, above the 6.1% expected. Food prices rose 0.8% in the month, new vehicles up 0.8%, shelter up 0.7%, and medical care services up 0.8%, all accelerating from the previous month’s pace. One of the more eye-opening stats that affect every one of us is that food prices have risen at least 0.8% for eight consecutive months. On average, a $100 grocery bill a year ago costs $111.40 today because of inflation. Shelter, such as housing costs, is the single largest component of the CPI and when prices goes up, tends to be the most persistent and is now 6.2% higher than a year ago.
  • The producer price index, which indicates the level of inflation for domestic producers of goods/services, fell 0.1% in August as expected while being 8.7% higher from the same month a year ago. Core prices, which exclude food and energy prices, rose 0.2% in the month, meeting expectations, while the y/y rate was 8.1%, accelerating from 7.6% in July. Just like the CPI, the soft headline number is purely due to a drop in energy prices, which were down 6.0% in the month after a 9.0% decline in July. Transportation/warehousing services were surprisingly down for the second straight month, down 0.2% in August. All other components were higher.
  • Prices paid on U.S. imports fell 1.0% in August, following a 1.5% decline in July, which was a smaller decline than expected. Lower fuel prices led the index lower. Import prices are 7.8% higher from a year ago, down from July’s 8.7% rate. Prices of exports from the U.S. declined 1.6% in August, slightly less than expected, after a 3.7% decline in July, and are still 10.8% higher from a year ago. Lower agricultural and energy prices led the decline.
  • The number of unemployment claims filed the week ended September 10 was 213,000, down 5k from the prior week, with the four-week average falling 8k to 224,000. Continuing claims was 1.403 million, relatively unchanged from the prior week, with the four-week average falling 8k to 1.413 million.
  • Retail sales for August rose 0.3%, better than the 0.0% that was expected. With the CPI up 0.1% in the month, real retail sales (meaning inflation adjusted) rose 0.2% in the month. In addition, retail sales were 9.1% higher than the same period a year ago, but inflation adjusted retail sales were up just 1.2%. Strength was seen in vehicle sales which were up 2.8% in the month while weakness was seen in gas sales with a 4.2% decline, however this is all due to a drop in gas prices. Excluding these two volatile categories, retail sales were still 0.3% higher. Other areas seeing solid sales growth was building materials, up 1.1%, department stores up 0.9%, restaurants/bars up 1.1%, and miscellaneous store retailers up 1.6%, with weakness in furniture, electronics, personal care, and online sales, all of which declined.
  • The Philly Fed manufacturing survey index fell back into negative territory for August at -9.9, down from 6.2 in July, for the third negative reading in the past four months. New orders was a large detractor with the index at -17.6, shipments falling 16 points to its lowest since May 2020 but still positive at 8.8, employment declined but remained strong, while prices remain high but the survey indicated they were less widespread compared to prior months, down 14 points to a still elevated 29.8.
  • The Empire State Manufacturing survey index gained about 30 points in August but remained in negative territory at -1.5. New orders grew slightly, shipments recovered sharply, delivery times held steady, employment improved slightly, while price indexes moved lower indicating a deceleration in the rate of price increases. However, looking forward, firms were not very optimistic in business conditions over the next six months.
  • The University of Michigan’s consumer sentiment survey index, which gauges how consumer think about their own financial situation and the health of the economy, was 59.5 for September. This was roughly in line with expectations, higher than 58.2 in August, and a bounce from the low water mark of 50 back in June, which was also an all-time low. The index on current conditions was 58.9, relatively unchanged, while expectations was 58.0. The one-year ahead inflation expectation was 4.6%, down from 4.8% the prior month and down from the high of 5.4% in March. The five-year ahead inflation expectation fell to 2.8% from 2.9% and down from the high of 3.1% in June.

Company News

  • FedEx preannounced its quarterly earnings results earlier than expected which included a significant miss on earnings of $3.44 per share versus the $5.10 per share that was expected, while withdrawing its guidance for the full year. The company blamed global volume weakness which accelerated over the past several weeks, along with challenges in Europe, causing investors to question whether this was a red flag for the global economy or if it was a company specific problem for FedEx.
  • GE moved lower Thursday after the CFO said ongoing supply chain issues are continuing to cause a delay in deliveries in the quarter and are pressuring the company’s cash flows. The company also said it expects the spinoff of its healthcare unit to be completed in the first quarter 2023.
  • The LA times had a report last week that Disney is considering merging Hulu & Disney+. In its Investor Day, CEO Bob Chapek said its ad-supported Disney+ service will have the same margins as the ad-free Disney+ service “at worst” and says pricing power may come as the service is “way underpriced.” Chapek also said Hulu could be integrated into Disney+ in time, but it is dependent on something that is out of its control – Hulu’s other part owner Comcast who owns an approximately 1/3 stake. As part of the agreement, Disney could force Comcast to sell its stake in 2024, so at minimum the service would be combined then. Regarding calls for the company to spinoff ESPN to a standalone company, Chapek said they are “confident that the best place for ESPN is within the Walt Disney Co.”
  • The WSJ reported Netflix is estimating its ad-supported service will have about 40 million subscribers, with 13.3 million of those in the U.S., by the third quarter 2023, citing a document shared with ad buyers by Netflix as the company looks to lock in ad deals. In its latest quarter, Netflix disclosed it had about 220 million subscribers.
  • Twilio moved about 11% higher last Wednesday after saying it would restructure to reduce costs, improve margins and shift its selling capacity to speed up software sales, all in effort to improve profitability. The restructure will result in about a 11% reduction of its workforce.
  • In conjunction with its earnings release, Adobe said it will acquire online design collaboration company Figma for $20 billion in a cash and stock deal. Its earnings report was mixed with mixed guidance as well. The stock sold off as the company said the Figma deal would begin adding to Adobe’s earnings after the third year, suggesting a drag on the business over the first two years.

Other News

  • Bloomberg reported the Biden administration is looking to refill the U.S. strategic petroleum reserve (SPR) with oil prices around $80 per barrel, with officials citing the desire to time the purchases to help protect US growth in oil production as well as to prevent prices from collapsing. The SPR fell to its lowest level since 1984 after Biden announced a 600 million barrel withdrawal over the past six months. Later in the week a Department of Energy spokesperson said the administration was not looking at a “trigger” price where it would begin buying and suggested replenishing the reserve may not begin until after 2023.
  • For August, OPEC+ fell short of its production target by 3.58 million barrels which is higher than its 2.89 million barrel shortfall in July. Meanwhile, Russian oil exports fell to their lowest levels since it invaded Ukraine, and still has not seen the affects of the European ban on Russian oil which goes in effect in December.
  • After a series of restricting exports of certain chips to China over the past several weeks, Reuters reported the White House is preparing to widen the restrictions on exports of semiconductors to China in another move to “protect U.S. national security and foreign policy interests,” more specifically to prevent China from obtaining chips that can help them progress on artificial intelligence and related chipmaking tools, as well as enhance military applications. Separately, Reuters also reported the administration is considering several rounds of sanctions against China in effort to deter them from invading Taiwan, while pressuring the European Union to do the same. The U.S. has an interest in Taiwan because they are home to some of the world’s largest semiconductor foundries (manufacturers), including the largest Taiwan Semiconductor, and an invasion would further disrupt the global supply chain.
  • The Department of Labor said unions and labor negotiators have reached a tentative labor agreement that will avoid a nationwide railroad strike that otherwise would have begun at midnight Thursday. Union members will be given a 24% raise over the five-year agreement, a cash bonus, and improved working conditions. A rail strike would have halted transportation of nearly 30% of the nation’s freight, cause another setback to the already struggling supply chains, most likely worsen the inflation situation, and cost the economy an estimated $2 billion per day.

Did You Know…?

Rising Mortgage Costs

One of the largest consequences of the Fed raising interest rates is that mortgage rates have moved over 6% for the first time since 2008, according to a weekly survey of lenders released by Freddie Mac. The average rate on a 30-year fixed mortgage rose to 6.02% last week and compares to 5.89% a week prior, 3.11% where the rate started the year, and 2.86% the same period a year ago. Assuming a 20% down payment and all else equal, the average monthly mortgage payment is 40.5% higher today than at the beginning of the year due to the rise in interest rates.

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Wine & Wills

Thursday, September 22nd @ 6:00 pm
Friday, September 23rd @ 12:00 pm
Join us in a complimentary estate and financial wealth planning seminar hosted by personal family lawyer, Kristen Boone, and the Wentz Financial Group team. We will review the significance of estate planning and how to create a plan to distribute assets after death. We will also review the role a financial advisor plays in the process.
To RSVP click here or email Sarah Perrin at [email protected]com

Career Development Day

Thursday, December 22, 2022 – All Day
Do you know someone in high school or college looking to get real life work experience from the finance industry? Wentz Financial Group will be hosting its 2nd Career Development Day at our office on December 22nd. The day will not only be for those looking to get a first look into financial services field but is open to any student wanting to get their feet in the door of the professional world. Don’t forget to RSVP by responding to this email or calling the office at 330-650-2700.

The Week Ahead

The main event this week is the Federal Open Market Committee meeting on Tuesday and Wednesday which concludes with the Fed’s policy decision, the release of its summary of economic projections, and Chairman Powell’s post-meeting press conference. The Fed is widely expected to raise rates 75 basis points, but the bigger question will be what the updated interest rate projections are and if there is any commentary from Powell on how far he expects rates to rise. He had previously indicated 4%, but with recent inflation data the markets are starting to expect that to be higher. There are several notable earnings reports this week including AutoZone on Monday, Stitch Fix on Tuesday, General Mills and Lennar on Wednesday, and Costco, Darden Restaurants, and Accenture on Thursday. Elsewhere on the corporate calendar will be a closely followed conference by Nvidia and several brokerage conferences. The economic calendar will include an update on the housing market with the housing market index on Monday, data on housing starts and permits on Tuesday, and existing home sales on Wednesday, as well as jobless claims on Thursday.