weekly market update

It was a fairly quiet week as the S&P 500 witnessed its lowest trading volumes of the summer and investors largely shrugged off important inflation data.  Thursday saw the consumer price index (CPI) snap a twelve-month streak of sequentially lower headline year-over-year inflation, rising from 3% in June to 3.2% in July, but markets traded mostly sideways, as the rise in inflation was due to the “base effect” switching from a tailwind to a headwind.

What does that mean?  On a month-over-month basis, for example, headline CPI was the same as June’s monthly pace, up 0.2%.  However, since CPI inflation peaked in June 2022 at 9.1% and decelerated to 8.5% in July 2022, the July 2023 CPI data had a much less favorable basis of comparison and thus rose to 3.2% year-over-year.  Markets understand this and as a result, the S&P 500 closed the week only slightly lower.

Going forward, however, it does appear as though the easy gains as it relates to inflation coming back down towards the Fed’s 2% target have probably been achieved.  If you took the last three months of CPI data and annualized them, for example, headline inflation is only 1.9% while core inflation (CPI excluding food and energy) is 3.1%.  However, with oil prices up over 20% since mid-June and gas up nearly 25% since late last year, future inflation reports will have to contend with higher energy prices and continued headwinds from unfavorable “base effects”.  In addition, food prices are also something to watch as beyond inflationary pressures borne from Russia choosing not to renew the Black Sea Grain Initiative, rice has surged to its highest levels since 2008 due to damaging effects of El Nino weather coupled with India, the world’s largest rice exporter at 40% market share, opting to ban rice exports.

Next week will be highlighted by the retail sector.  Home Depot, Target, TJX, and Walmart will all report second quarter earnings.  In addition, retail sales for July will come out on Tuesday.  With the national average gas price rising to $3.84/gallon (per AAA) coupled with student loan payments set to resume on September 1, this retail data might be particularly interesting.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder

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