Thanks to a hotter-than-expected consumer price index (CPI) inflation print of 8.3%, stocks suffered their largest weekly drop in 3 months. The report dimmed investor hopes that the economy had moved beyond "peak inflation". Even more concerning was that core inflation (ex-food and energy) jumped to 6.3%, its highest level since March.
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Wall Street broke its losing streak last week as investors bet the market sell-off had bottomed after surrendering half its summer rally. Inflation fears are also moderating as oil prices declined—hitting their lowest level since Russia’s invasion of Ukraine—helping reset inflation expectations.
Stocks finished lower heading into the Labor Day weekend, as investors were still trying to digest the implications of the Fed's hawkish tone coming out of Jackson Hole. The S&P 500 extended the losing streak that started with Jerome Powell's speech on August 26th.
A commodity price supercycle is an extended period of time during which commodity prices are above historical norms. There have been two occasions in the past 50 years coined "commodity supercycles" - the end of the Bretton Woods system in the early 1970s, which ended in the collapse of oil prices in 1986; and the period from 2001 to 2014 fueled by rapid growth in demand from China, the U.S. shale boom, and post-global financial crisis stimulus.
Stocks sold off last week on rate worries thanks to the hawkish tone coming out of the Kansas City Fed's annual conference in Jackson Hole, Wyoming.
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Stocks gave back a portion of last week's gains after hawkish Fed member James Bullard openly questioned whether inflation has really peaked. The week's economic data also gave fuel to the fear, as retail sales rose 0.7% in July ex-energy and autos.
The much-awaited CPI inflation report came out last Wednesday, and while CPI is still at a YOY level of 8.5%, it was zero for the month of July, giving investors hope that inflation has peaked.
Markets posted solid gains last week as the Fed raised interest rates by another 75 basis (0.75%) points as expected. Second quarter GDP was negative for the second consecutive quarter, coming in at -0.9%. In a "bad news is good news" scenario, investors are betting the Fed will need to be less aggressive going forward with rate hikes to fight inflation.
Signs of a cooling economy and fading inflationary pressures boosted investor sentiment last week. Risk-on assets like small cap and tech outperformed, and consumer discretionary stocks rallied as well.