Market Review: Living on the Edge
Global financial markets declined last week as investors digested the September 11 release of the U.S. Consumer Price Index (CPI) report. In August, core CPI rose 0.3% month-over-month, exceeding consensus estimates of 0.2%, and the year-over-year reading eased to 2.4% from July’s 2.5%. The higher monthly reading reflected persistent inflationary pressures and strengthened market expectations for a Federal Reserve (Fed) hike.
Sentiment for a rate hike had already been reinforced midweek when the U.S. Treasury announced smaller bond buybacks than consensus expected. The announcement added pressure to already climbing yields, with the 10-year U.S. Treasury bond yield approaching 5%.
Geopolitical tensions added to volatility; escalation in the Middle East pushed Brent crude oil prices toward $105 per barrel. Rising yields and energy costs weighed on developed markets, in addition to the European Central Bank’s (ECB’s) rate hike and hawkish outlook.
Emerging markets fell for the first time in eight weeks, weighed down by stocks in China and India.
Market Outlook
Multiple central bank rate decisions are scheduled this week, most notably, the Fed's September 16 announcement. We expect price volatility to persist even after the decision, as rising yields, elevated government debt, high oil prices and the U.S. midterm elections continue to pose risks. Continued profit margin expansion and resilient economic activity support our tilt toward equities.
Chart of the Week
The latest CPI report reinforced investor concerns about persistently above-target inflation, underscoring the challenge facing the Fed.
Expectations are now near 90% for a September rate hike.
High expectations of rate hikes coincide with higher bond yields and equity price volatility.
