Week of September 9 - 13, 2019

Capital Market Implications

Surprisingly, due to a 0.9% jump in medical insurance costs, consumer prices firmed more than expected in July. Both hospital care and medical insurance costs contributed to the month-over-month increase. Which in turn, pushed the year-over-year core CPI up to 2.4%, its highest level since July 2008. Core producer prices were also higher, having increased 2.3% for the year. Although these inflation levels are not alarming, it is clear consumer prices have bottomed and now are firming. On a positive note, industrial production and capacity utilization in August were healthy and above estimates, while the remainder of the week’s economic releases were in line with recent trends: July retails sales were solid and the University of Michigan Consumer Sentiment Index rebounded in September.

Last week, the S&P 500 Index rose 1.0% while the Dow Jones Industrial Average increased 1.6%. Value plays led the way, as financial, energy and material stocks all gained more than 3.0%. Although the overall market was positive, the rotation away from high valuation and momentum stocks continued apace. As such, technology stocks lost ground along with consumer staples. Again, last week, international markets demonstrated strength, with both developed foreign markets and emerging markets increasing nearly 2.0%. On the other hand, higher than expected inflation numbers and strong retail sales sent the yield on the ten-year Treasury note skyrocketing, up 34 basis points to 1.9%, a level last seen in July. The sudden and dramatic back up in yields pummeled bond prices. Although high-yield bonds were spared, all other sectors of the bond market suffered (off more than -1.0%) with US corporate bonds getting hit the hardest, down -2.2%.