Turns out it’s Not Transient – Halyard’s Weekly Wrap – 9/8/23

Today we’ll look to the coming week, instead at the conclusion of the weekly wrap.  The release of the consumer and producer price indices, retail sales and the Michigan surveys will be a litmus test for the Fed’s rate decision later this month.  Comments from committee members seem to indicate that they will hold rates steady, but CPI and retail sales could prove problematic to that view.  Recall that last month retail sales spiked, and many attributed the uptick to the Amazon prime-day sales.  As such economists are looking for a month-over-month change of 0.1%.  Anecdotally though, contemporaneous measures indicated that retailing continued to hum which could result in an above expectation result.  More of a concern though is CPI.  In June, the year-over-year measure plunged from 4.0% to 3.0%, giving the Fed some comfort that policy was moving in the right direction.  Then the measure ticked up to 3.2% in July.  Not a happy outcome but tolerable given that core inflation remained subdued.  A similar outcome is expected next week, only economists are forecasting the YOY measure to tick up to an indefensible 3.6%.  Rising energy costs will be the culprit but that’s not going to matter to consumers. The fact remains, the cost of filling the gas tank continues to hit our wallets.

Away from official government reporting, the psychological impact of inflation is having a real impact on wages.  Auto manufactures are locked in a union negotiation that is the most public battle in recent memory.  GM offered a 10% wage increase that the union called insulting; the union is asking for a more than 40% raise among a host of other demands.

Similarly, UPS resolved an equally contentious union negation last month that will result in the average full-time driver taking home $170,000 annually in pay and benefits.  Consequentially, UPS announced that the company intends to raise average prices 5.9% in the coming year.  Needless to say, inflation expectations are beginning to become entrenched.

Regardless of what the FOMC does, the market continues to push yields higher.  For the week, the two-year note briefly rose above 5.0% before closing at 4.97%.  It seems that 5.0% is the bogey for many fixed income buyers as it has risen above that level six times in the last month only to immediately reverse lower.