Both equity and bond markets are under pressure after the latest U.S. inflation reports this week. Consumer prices increased in August, despite expectations for them to fall on a month-over-month basis.
Core CPI, that strips out food and energy prices popped, was +0.6% over the previous month rising to 6.30%. July’s reading was 5.90% As we mentioned in our previous market updates, shelter accounts for almost 33% of CPI. Rent is 8% and private housing is 25% of the total shelter component. Housing and rent prices were responsible for half of the rise in core inflation even with the drop in gas prices.
The Federal Reserve is all but guaranteed to hike interest rates by at least 75 basis points (.75%) next Wednesday, which will bring the median overnight rate to 3.125%. The market is pricing that rate to be 4.40% in the second quarter of 2023.
The rapid rise in both core goods and services inflation shows that higher wages are starting to feed into prices. The Federal Reserve has a long way to go until inflation approaches its target.
Bottom line: The core CPI print indicates wages are a top inflationary driver. I believe that shelter costs will soon moderate but the rapid pace of inflation in other services will keep pressure on CPI for the near future. The rapid increase in interest rates has created an opportunity for bond investors. US 2yr rates touched a 15 year high today. The current landscape for fixed income investing has the potential to be attractive.
As always, we will continue to monitor the incoming data. Please let me know if you wish to connect to discuss further.
This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. This material is intended for general public use. By providing this content, Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. All investments contain risk and may lose value. Past performance is not a guarantee of future results. 2022-14853 Exp 9/24
Jeremy has been in the financial advisory business since 2005 after graduating from Fordham University’s School of Business. He joined Tomoro as a managing partner in 2014. During his tenure, Jeremy has consistently excelled as an advisor in both the personal household and business planning arena. As a managing partner, Jeremy also serves as a mentor to all associates and is hands-on in supporting Tomoro’s growth planning. He has completed various curriculums and certifications, such as New York University’s graduate studies in financial planning, is a Certified Exit Planning professional, and Investment Advisor Representative. He and his family reside in Colts Neck, NJ.
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The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The Index focuses on the large-cap segment of the U.S. equities market. The Hang Seng Index (HSI) is a market-capitalization-weighted stock market Index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong.
Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic, and industry conditions.
Statistics sources from Central Bank Rates and Bloomberg.