Both equities and fixed income assets declined last week as recession fears were sparked. Investors seem to be coming to the realization that the U.S. economy is currently in a recession, but the depth and length of that recession is still up in the air.
The Fed's GDPNow forecast for 3rd quarter GDP shows a flat number, while the consensus shows a slightly negative print. The Fed seems to be on-track with consensus estimates with a 75 basis point rate hike later this week. Current futures on the Fed Rate Hike to be announced Wednesday show an 80% probability of a 75 basis point hike. Last week, bell weather company Fed Ex referenced a “global recession” in the works, which didn’t help markets that had already sold off more than 3% prior to Friday’s action.
Despite the stoked fears, which we believe are heavily belated, there was some good news last week.
The inflation data, despite the one-month increase versus an expected decline, showed a 2nd consecutive month of decline on a year-over-year basis. In fact, we have made reference in the past to the moment when the Producer Price Index (PPI) drops below the Consumer Price Index (CPI), a peak in inflation historically follows. The data last week showed a considerable drop in the PPI from 9.8% in July to 8.7% in August. That put PPI only 0.4% ahead on CPI on a year-over-year basis, when the gap was 3% just 6 months ago. If we get another drop in September, it is likely that inflation has indeed peaked. Retail Sales also remained consistently in the positive zone, meaning the U.S. consumer continues to spend. At some point, investors will begin to look at the picture 6 to 9 months out for life after Fed rate hikes.
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