Author: Davis Finke, CFA
Friday’s consumer price index (CPI) report for August confirmed that inflationary pressures remain uncomfortably high. Headline CPI rose 0.4% for the month and 3.4% year-over-year, both in line with expectations. Core CPI, which excludes food and energy, increased 0.3% for the month, above expectations, while the annual rate of 2.4% was in line with forecasts. The primary drivers of the headline increase were gasoline, up 3.9% for the month, and fuel oil, up 10.1%. Overall, the energy category increased 2.1% for the month. Outside of energy, upward price pressures have also surfaced in areas such as used cars and trucks, shelter, and transportation services, providing some evidence that the effects of higher energy prices may be beginning to work their way into other parts of the inflation basket. Thursday’s producer price index (PPI) report for August painted a similar picture, with the index rising 5.4% year-over-year and 0.4% for the month, while energy prices accounted for a majority of the increase. These inflation reports, the last before next week’s Federal Open Market Committee (FOMC) meeting, have reinforced expectations for tighter Fed policy. The futures market is now pricing in a roughly 87% probability of an interest rate hike at next week’s meeting, up from 60% last week.
Oil prices, one of the primary drivers of the current inflation environment, remained under upward pressure this week as the U.S. and Iran exchanged additional strikes on Tuesday and Wednesday. As a result, Brent crude futures exceeded $109 per barrel for the first time since May. Treasury yields moved higher alongside oil prices, with the 10-year yield reaching its highest level since the fall of 2023 and the 30-year yield reaching its highest level since 2007. However, both yields and oil prices fell on Friday, helping equity markets rebound to end the week. The declines followed reports that several Gulf states could meet with Iran next week to discuss a temporary agreement aimed at easing hostilities and managing shipping through the Strait of Hormuz. Each of the three major U.S. equity indexes rose by nearly 1% on Friday, helping offset some of the week’s earlier losses. Despite Friday’s rebound, all three major indexes still finished the week lower, with the Dow down 1.59%, the S&P 500 down 0.83%, and the Nasdaq down 0.60%. At the sector level, eight of the 11 sectors ended the week lower, with each declining by more than 1%. Health care was the worst performer, down 3.54%, followed by materials, down 2.84%. Energy, which benefited from a 9.22% increase in the price of Brent crude oil this week, was the best-performing sector, up 1.69%. Communication services and technology were the only other sectors to finish the week higher.
Looking ahead to next week, investor attention will center on Wednesday’s FOMC meeting, when policymakers will release a new Summary of Economic Projections and vote on the target range for the federal funds rate. Should the Fed raise rates, as futures markets currently imply is highly likely, it would mark the first rate increase since the summer of 2023. Investors will also be paying close attention to the reported talks between Iran and several Gulf states, as markets will likely remain highly sensitive to any developments that could either ease or further escalate tensions in the region.
