(First published: 6:30 EST)
Stocks finished Wednesday’s choppy trading session in the green. The Dow Jones Industrial Average (DJIA) gained 0.1%, while the S&P 500 (SPX) closed 0.34% higher. Meanwhile, the Nasdaq 100 (NDX) led the indices with a 0.84% jump. On Tuesday, the major indexes faced their worst losses since June 2020. The S&P 500, the Dow, and the Nasdaq 100 lost 4.32%, 3.94%, and 5.54%, respectively, after ending four straight days in the green.
The real estate and materials sectors were the session’s laggards, as they both declined by 1.22%. Conversely, the energy sector was the session’s leader, with a gain of 2.84%. In addition, WTI crude oil remained below $90 per barrel, as it hovers around $88.81 per barrel.
Furthermore, the U.S. 10-Year Treasury yield remained flat at 3.4%, while the Two-Year Treasury yield increased to around 3.79%. This brings the spread between them to -39 basis points. The negative spread indicates that investors still have fears of a recession.
Inflation Still Raging on
The latest Production Price Index (PPI) data indicated that price of goods sold by manufacturers fell 0.1% in August after seasonal adjustments, which met forecasts. Core PPI (excluding food, energy, and trade services) was up 0.2% in August versus a 0.1% rise in July.
Another month, another unexpected inflation data. August’s headline CPI data reported by the Bureau of Labor Statistics, which includes food and energy prices, rose 0.1% from last month, and 8.3% year-over-year. On the contrary, economists surveyed by Dow Jones had expected a 0.1% sequential drop and an 8% year-over-year rise in prices.
This rise in inflation came in despite a 5% fall in gas prices in August.
This gyration in CPI every month is catching Wall Street off guard frequently, making the market outlook even more uncertain. Most importantly, the Fed’s monetary policy decisions are based on this data.
The August reading sparked concerns about a potentially larger-than-expected interest hike by the Fed. Financial research firm Nomura was quick to mention that a 100 basis-point interest rate hike in September is highly likely.
In fact, the CME FedWatch tool revealed that the likelihood of a 100 basis-point interest rate hike in September is at 24% presently, compared with zero over the past month.
Consequently, the market is also pricing in a higher chance of a higher Fed Funds rate for the end of the year. Indeed, the market’s expectations for a rate in the range of 4.5% to 4.75% increased to 8.9%, which is up from yesterday’s expectations of 8.1%. For reference, the expectation for a Fed Funds rate in this range was 0% last week.
Rail Freight Problems Threaten Further Supply Chain Pressures
Meanwhile, the back and forth between a body representing freight railroads, and two labor unions over contracts, has invited the intervention of the government. A White House-appointed panel has been directed to resolve the disputes by Friday midnight.
The government is also in talks with logistics companies including ocean-shipping, trucking, and airfreight to continue the movement of goods in the event of a rail strike. The administration is most concerned about the smooth movement of food, energy, and public health-related products through the supply chain.
A possible strike by the railroads can mean further pressure on the supply chain and push the prices of other modes of delivery, putting further pressure on inflation.
U.S. 30-Year Mortgage Rate Hits Highest Level since 2008
On Wednesday, the Mortgage Bankers Association released its weekly report for the U.S. 30-Year mortgage rate. The mortgage rate increased to 6.01% compared to last week’s reading of 5.94%. For reference, this is the highest level since 2008.
Due to the higher rates, the number of mortgage applications decreased week-over-week by -1.2%, following last week’s decrease of -0.8%. This indicates that sentiment in the real estate market is falling, which is consistent with other data that has been released so far.
In addition, mortgage application volume is down substantially on a year-over-year basis, with the Mortgage Market Index at 255 compared to 707.9 on September 15, 2021.