Written by: Trek Investment Committee
The market and the economy can be somewhat delicate, often feeling like a tightrope walk.
There’s a sense of uncertainty about which way things might sway, given the various source of instability. This uncertainty arises from multiple factors, including geopolitical risks, ongoing concerns about inflation, speculations about the Federal Reserve’s future actions, and the impending presidential election next year.
The US Bureau of Statistics reported slightly higher monthly CPI numbers than expected at 0.4% but excluding food and energy the index was up 0.3% in September, the same as August. The 12 months ending in September showed an annual inflation of 3.7%, the same as August. On the face of it, inflation seems to have stalled in the past two months in terms of declining inflation on a year-over-year basis.1
While the declines in inflation helped markets dramatically in the first half of 2023, the slowing in declines have caused the markets to begin listening to what Federal Reserve policymakers have been saying for the past year. Markets behaved at the beginning of the year as though they did not believe the Federal Reserve would keep interest rates high for a prolonged period. The idea of higher interest rates for longer to combat inflationary pressures is a large departure from the policy following 2008 until 2022, where interest rates were kept extraordinarily low.2
The biggest impact of this is also the part of inflation that is coming down slowest. Shelter is still showing at over 7%. According to The Bureau of Statistics, Shelter makes up nearly a third of the CPI market basket.3
Chart Source: Ned Davis Research Group
With mortgage rates now roughly 8%, many potential home buyers will continue to lease their shelter. This makes it very difficult to see inflation dropping as quickly as it has during the first half of 2023. That argues in favor of believing the higher-for-longer interest rates.4
If rates stay high, the market will likely be keeping a keen eye on impacts to unemployment, borrowing costs, household debt, strength of consumers, and whether something eventually breaks in the economy. This supports the idea that the market is in a delicate state, and the reaction to data is most likely going to be amplified by these factors. Whether or not shelter prices can come down with unemployment low, and absent a recession, is something that is challenging to predict.
It can be easy to get lost in the minutia. If you have questions or concerns, then it may be a good time to touch base with your financial professional.
Sources:
- Economic News Release. Consumer Price Index Summary. U.S. Bureau of Labor Statistics. Thursday October 12, 2023
- Minutes of the Federal Open Market Committee. Federal Open Market Committee. September 19-20, 2023
- Measuring Changes in Shelter Prices in the Consumer Price Index. Commissioner’s Corner. U.S. Bureau of Labor Statistics. May 20, 2023
- Current Mortgage Rates, Forbes.com, October 16, 2023
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