September Angst

Stocks opened modestly higher this morning due to a better than expected inflation report (see below). But gains quickly faded, blending in with what has been a pretty rough September. Major stock market indices have fallen 3-5% for the month. Of course, this is typically a weak part of the year. But I suspect rising oil prices and rising bond yields are also culprits. Traders are worried that high gasoline prices could crimp consumer spending for non-essentials. And more importantly, higher long-term bond yields suggest higher inflation expectations down the road. So while stock & bond prices tend to move opposite one another, that’s certainly not the case right now. Stocks are really looking to bonds for direction and it all comes down to interest rates. How high will the 10-year Treasury yield go, and what level is “normal?” Will inflation continue to slow over the next several years, or will it remain sticky around current levels?

A report published today by the Bureau of Economic Analysis (BEA) shows consumer income & spending growth remain healthy while inflation continues to drift lower. Incomes rose .4% in August (and 4.8% from a year ago). Economists at Bloomberg attribute this continued wage growth to “accelerated pace of hiring and the increase in average hours worked.” Consumer spending matched income growth of .4% for the month, which is healthy even though it slowed sharply from July. Compared with a year ago, spending is up about 5.8%. Just as important, the Federal Reserve’s preferred inflation gauge continued to moderate last month. The Core PCE Price Index rose a mere .1% in August and the annual rate fell to 3.9% from 4.3%.

Throwing the BEA (and other recent macroeconomic) reports aside, traders are increasingly concerned about rising gasoline prices, the resumption of student loan payments, a possible government shutdown, and auto worker strikes. These near-term, temporary issues will dominate sentiment and could put a damper on October.