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Still trying to figure out inflation……….and the Fed


  • Based on the CME Fedwatch tool, bond traders are no longer predicting that the Fed will cut interest rates by more than 75 basis points this year – their view finally now moving in line with what has been the central bank’s projected likeliest outcome for months. To this end, the benchmark U.S. 10-year Treasury has hovered in a tight range between 4.25% and 4.33% in recent day.
  • With the focus remaining on the Fed, investors have been bracing for tomorrow’s critical inflation release which is likely to strongly affect the Fed’s mid-March meeting. The Thursday release of the Personal Consumption Expenditures (PCE) prices report is eagerly awaited on Wall Street after data earlier this month called price growth progress into question. Investors have already backtracked dramatically from previous hopes for rate cuts starting in March, and a disappointing PCE report could further reinforce “higher for longer” concerns regarding Treasury yields.
  • Additionally, the wave of consumer optimism finally broke this month as the Conference Board’s consumer confidence index fell for the first time since November. Labor market uncertainty as well as the coming election, though not inflation, poured cold water on the survey, which was expected to show confidence having held steady at a two-year high.
  • On the global stage at this week’s G-20 meeting, Treasury Secretary Janet Yellen cited central bank interest-rate hikes around the world as one potential risk to a generally favorable economic outlook. She also noted that “inflation has been coming down in many countries,” while stopping short of suggesting that rate cuts might now be appropriate. Geopolitical risks pose another danger, with “significant economic spillovers” in the case of an expanded regional conflict in the Middle East, Yellen said.
  • On a more positive note, the likelihood of yet another federal government shutdown this weekend appears to be fading. Congressional leaders expressed confidence yesterday that they could avoid a partial government shutdown on March 1 after meeting at the White House with President Joe Biden. We hope that this optimism is warranted as the repeated government shutdown ill serves members of all political parties.

Cautionary inflation and consumer readings spread concerns…

  • Following the long weekend, investors returned today staring down earnings from the nation’s biggest retailers and an update on the Federal Reserve’s rate path perspective. Additionally, market star Nvidia (NVDA) shares its latest results on Wednesday afternoon. Last week, however, did close on a down note – ending a five-week winning streak on Wall Street.
  • Driving the decline were U.S. consumer and wholesale inflation readings which helped put the rally genie back in the bottle. Wholesale prices in the United States picked up in January, the latest sign that some inflation pressures in the economy remain elevated. The Labor Department reported Friday that its producer price index — which tracks inflation before it reaches consumers — rose 0.3% from December to January after having fallen -0.1% from November to December.
  • Additionally, the January retail sales report showed sales dropped. The whole sale price reading provided the latest sign that some inflation pressures in the economy remain elevated. In other words, neither inflation nor consumer spending readings showed improvement. To date though, markets seem largely impervious to suggestions that the Federal Reserve isn’t going to start cutting interest rates any time soon. The good news for stocks has been surprisingly strong economic growth and low unemployment. At some point, though, the sharp Fed rate hikes since 2022 will start to bite into corporate performance. Compounding the issue, consumers have run down savings from the Covid-19 pandemic and mortgage rates are once again climbing to two-decade highs.
  • Additional messaging from the central bank will happen on Wednesday when minutes from the last Fed rate setting meeting are released along with at least five central bankers giving speeches later in the week. Current messaging suggests that the Fed is in no rush to start cutting rates. Expectations for the first move lower have now slid back to June. It should be kept in mind that as recently as a few weeks ago, rate cuts were anticipated as early as this March, at least according to the CME FedWatch tool. The markets are finally starting to pay attention, even if not embracing, the central bank’s continued signaling of “higher for longer” – even if the broader ramifications of this policy remain in doubt.


  • Following the Fed’s most recent meeting, the equity markets have continued to rally despite additional commentary from the central bankers emphasizing that rate cuts are very unlikely to start in March. Over the weekend, Chair Powell, in an interview on the TV show 60 Minutes, said that he is “pleased inflation is coming down quickly and the economy is strong.”  However, the takeaway from his commentary was that the Fed can afford to be patient when deciding when to start lowering interest rates. It was the very same message he gave at last week’s interest-rate decision, and he also reiterated that the Fed only sees three quarter-point rate cuts this year, whereas the market still predicts as many as six.
  • An unexpectedly robust jobs number on Friday underlined the point that the economy does not need any help from the Fed to keep humming with unemployment of 3.7% and the 4th quarter’s GDP growth of 3.3%. While officials are growing more confident that inflation is heading toward their 2% target, Fed policymakers are unlikely to have the necessary confidence to cut rates by the March meeting, seven weeks from now.
  • Adding a counterpoint of market support in the face of renewed emphasis on rates being higher for longer, the corporate earnings season has turned more positive. With more than half of the S&P 500 having reported earnings, annualized earnings growth of 1.6% is now anticipated for the fourth quarter, according to FactSet. If corporate earnings remain positive, it will represent a second-consecutive quarter of earnings growth.
  • As for international affairs, markets seem to have quietly accepted the ongoing war in Ukraine, the Israeli invasion of Gaza, and the escalating Houthi attacks on Red Sea shipping. At least until they don’t. With the market’s fear gauge remaining near multi-year lows, there is much investor complacency in the face of these potential international flash points.



  • After drifting up the last few days of 2023, Wall Street starts the New Year a bit nervous with broad declines in many securities, especially in those sectors which have recently outperformed. One Schwab analyst suggested that the recent declines broadly reflected a combination of profit-taking and investor rotation into last year’s underperforming sectors, specifically energy, health care, and utilities. Adding to recent downward pressure, concerns about increased tensions in the Middle East have caused global oil prices to rise. Also of continued worry is the ongoing U.S. standoff with China over semiconductors as the Netherland government ordered a major chipmaker equipment supplier to suspend some exports to China.
  • As the week progresses, investors will be focused on new economic readings as they should give additional color to the Fed’s next move. Nonfarm payrolls, unemployment, and job openings data are all coming out over the next several days with expectations remaining generally positive. Counterbalancing some of the recent optimism was today’s job openings data which hit two-year lows – thereby fueling concerns that the labor market may be softening faster than the Fed originally predicted.
  • Currently, five or six quarter-point Fed interest rate cuts are projected for 2024. By contrast, a December forecast by the Fed suggested that the central bank would only make three cuts. As of this morning, the CME Fedwatch Tool was predicting only a modest likelihood of a rate change at the FOMC’s January end meeting but a nearly 72% likelihood of a rate cut at the Fed’s March meeting.
  • The challenge for investors currently is that stocks appear to be priced for perfection while there is still much that could go wrong. There is a reasonable likelihood that inflation is more sticky and that the Fed does not cut as much as the market expects. If the Fed does loosen policy as much as anticipated, it may be because the economy has sharply slowed with production plunging as it runs into the wall of past rate hikes.

Markets take a victory lap after dovish Fed outlook…

  • US stocks surged over the past week in the wake of a December Fed meeting that projected a surprisingly dovish tone with markets concluding the fight against inflation is largely over. While Chair Powell and other officials had repeatedly and steadfastly pointed to the dangers of inflation in prior meetings—even after the Fed had halted its hiking cycle in favor of an extended pause—they took a decidedly different tenor in December.  Notably, Chair Powell appeared to emphasize the progress made toward the Fed’s 2% inflation goal rather than the difficulty of the ‘last mile’ in battling inflation as had been the case in prior remarks.


  • Notwithstanding the market’s declaration of victory, it may be prudent for investors to tap the brakes on expectations as many sectors continue to appear fully valued with the market appearing to be pricing in five or six rate cuts next year. Meanwhile, there remain a host of risks on the horizon.  While the ‘cost-push’ component of inflation has indeed declined, the ‘demand-pull’ component is much stickier and will account for much of the ‘last mile’ of the battle to bring inflation down to the targeted 2%.  As noted previously, core inflation remains at the 4% level and has been trending up on a month-over-month basis.


  • Energy shares climbed behind a rally in WTI Crude Oil futures, which jumped 1.7% on Monday to end at a two-week high amid concern over supply disruptions following attacks on ships in the Red Sea.  While markets appear to be responding favorably to the higher oil prices, it’s not difficult to see that higher energy costs would undermine the Federal Reserve’s battle against inflation and could put projected 2024 interest-rate cuts at risk.  Back in 2021, when the Ever Given container ship blocked the Suez Canal for six days, the resulting delays to cargo deliveries took months to resolve.

Dumaine Investments Weekly Market Update – November 1, 2023

– After a brief rally at the start of October, US stocks traded lower over the second half of the month as elevated interest rates, mixed earnings, and heightened tensions in the Middle East took a toll on markets. The S&P 500 posted its worst October performance in three years, dropping more than 2%. More alarmingly, the Nasdaq Composite had its worst October since 2018 as the tech sector, priced for perfection, saw a material selloff.

– On Wednesday, The Federal Reserve opted not to hike the Fed Funds target rate for the second consecutive meeting, the third pause overall in 2023. While the Fed appears to have completed the most aggressive campaign of interest-rate increases in a generation, Chairman Powell still has a lot to worry about, and it would seem unwise to completely rule out another hike before the end of the year. The CME Fedwatch tool is currently pricing in a 25% probability of a December rate increase.

– Economic data released Tuesday showed wage growth is indeed cooling, but not as quickly as the Fed would like. At the same time, year-over-year home prices continue to rise appreciably more than consensus forecasts. Moreover, the United Auto Workers (UAW) union recently won a 25% hourly pay raise from all three auto makers. While the UAW’s success was great for its members, Fed officials may wonder if this move sets a precedent for other workers who are still feeling the pinch of two years of high inflation.

– Prior to the Fed announcement Wednesday, the U.S. Treasury decided to moderate sales of its longer-dated debt, a move that is expected to push down bond yields—and buoy bond prices—while also providing support for stocks. The department said it would sell $112 billion in long- and medium-term securities in its coming auctions but reduce the increase in 10-year and 30-year auctions as compared with the amount sold in August.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – October 24, 2023

• US stocks traded down over the last week amid an environment of rising long-term rates, mixed earnings results, and an escalating conflict in the Middle East. The 10-year Treasury yield almost hit 5.0% Monday before retreating to 4.9% later in the day. On the macroeconomic front, month-over-month retail sales were well ahead of consensus forecasts while new building permits were in-line with expectations.

• Economists raised their projections for US growth through early 2024 and trimmed the odds of a downturn as consumers continue to spend. The American economy likely expanded at an annualized 3.5% rate in the third quarter—the fastest in nearly two years—as forecasters increased their household spending forecasts. And while growth is expected to slow in the following two quarters, economists in the latest Bloomberg monthly survey still raised their future estimates for gross domestic product growth.

• Treasury yields retreated quickly on Monday after almost hitting the key technical level of 5.0%. Prominent bond bears said the rout had been excessive. Billionaire investor Bill Ackman wrote on Monday that he unwound his bet against US government bonds amid rising global risks, while Bill Gross, renowned co-founder of PIMCO, wrote that he is buying short-dated interest-rate futures in anticipation of a recession by year-end. Their comments coincided with a swift turnaround in yields to finish Monday’s session.

• Looking forward, there’s plenty of news in the pipeline ahead of the Fed’s next meeting on Nov 1. Official GDP data will be released Thursday while Core PCE inflation data (the Fed’s preferred inflation measure) are to be published on Friday. On the earnings front, four of the largest technology companies—the cohort that is largely responsible for stock gains this year—report this week, along with a bevy of other firms as earnings season hits high gear.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – October 17, 2023

• US stocks have traded flat over the past week as investors digest a host of new earnings and economic data, as well as attempt to assess the implications of the conflict in the Middle East. Markets moved down modestly after last week’s CPI reading came in largely in-line with expectations, before rebounding on Monday with no clear catalyst. Heightened geopolitical tensions together with a less than favorable global macroeconomic picture create an environment of extreme uncertainty and asymmetric risks in our view.

• Israel’s defense minister told the US to brace for a ‘long war’ against Hamas amid a global push to prevent the conflict from spreading. President Biden will travel to Israel on Wednesday to meet with Israeli leaders. US officials are worried about the potential for regional escalation by Hezbollah should Israel invade Gaza. On Monday, Iran said that an expansion of the war between Israel and Hamas was increasingly becoming unavoidable. More than 600,000 Palestinians have left northern Gaza on warnings from Israel and amid a bombing campaign that has killed thousands.

• The bond market continues to be marked by extraordinary volatility, including the highest levels of turbulence in the 30-year yield since the peak of the pandemic-era panic. For traders, the focus keeps shifting between rising geopolitical risks, an impending supply glut, concern over deficits, and expectations that the Federal Reserve’s interest-rate hiking cycle will tip the economy into recession.

• Looking forward, the next week will be full of potentially market-moving events. As earnings season kicks into full gear, technology and communication majors will begin to report, as well as several large industrial and financial firms. Johnson & Johnson reported Tuesday, Netflix and Tesla report Wednesday with American Express reporting on Friday. Ahead of the blackout before the central bank’s next decision, Federal Reserve Chairman Jerome Powell will speak in New York on Thursday.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – October 3, 2023

• US stocks continued to trade lower over the past week amid growing concerns about rates staying higher for longer, inflated tech stock valuations, and a decidedly mixed global economic picture. While a last-minute stopgap measure over the weekend prevented an imminent government shutdown, there remains plenty of room for doubt about an ultimate resolution to the budget showdown. The existing funding bill kicked the can down the road for only 45 days. Given the current state of division in congress, there is still a high probability of a government shutdown before year-end.

• The Federal Reserve’s message is finally being heard loud and clear by Wall Street. As discussed last week, the central bank was finally successful in shifting the focus toward higher-for-longer interest rates at its September meeting. Markets appear to have given up anticipating imminent rate cuts, and Treasury yields have shifted higher accordingly. The yield on the 10-year Treasury note reached 4.78% Tuesday, its highest level since 2007. The timing of the move—on the first two days of the fourth quarter and with little news—means last week’s rising yields cannot be attributed to end-of-quarter positioning. Rather, the ongoing change in interest rates appears to be a material market shift that is gaining momentum.

• While historically October has been a sanguine month for stocks, we remain concerned about risks on the horizon. The major risk factors that markets faced in September—sticky inflation, elevated oil prices, higher-for-longer rates—are all still on the table, and many trends in the global economy continue to worsen. We continue to maintain an underweight to stocks, and to be defensively positioned within the asset class—favoring lower beta sectors with less cyclical exposure. On the fixed income front, we are beginning to lengthen our bond maturities at the margin.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.

Dumaine Investments Weekly Market Update – September 26, 2023

• US stocks traded down nearly 4% over the past week as the September market selloff accelerated. Appetite for equities appears to be subsiding after a 20% rally this year fueled by artificial intelligence euphoria. Behind the recent wave of pessimism is the resolve by the US Federal Reserve to keep interest rates higher for longer—creating pressure on already stretched market valuations. Adding fuel to the fire, this comes amid existing concerns about workers’ strikes, global economic woes, resilient core inflation, and the possibility of a government shutdown.

• The Fed may have kept rates on hold last week, but it managed to jolt markets into finally believing borrowing costs are going to stay higher for quite a while. As we have noted repeatedly in our newsletters and weekly posts this year, this is by far the most probable scenario, and appears almost unavoidable. Nevertheless, markets are only now beginning to recognize the real possibility of ‘higher rates for the longer term,’ and the consequences for the economy and equity valuations. In short, the market has been obsessed with when rate cuts will begin and how plentiful they will be in 2024. That appears to have been replaced by the abrupt realization that interest rate policy will remain restrictive for some time.

• Last week’s jobs data release showed a surprise decline in weekly jobless claims to 201,000 in August, the lowest since January. This number, well below expectations, suggests the labor market is still hot. After the Fed’s economic projections Wednesday showed interest rates staying higher for longer, the labor data further solidified that concept for investors.

• Moody’s Investors Service, the only remaining major credit grader to assign the US a top rating, has signaled that its confidence is wavering ahead of a potential government shutdown. The blunt warning by Moody’s follows a downgrade last month by Fitch which cited concerns over the nearly catastrophic US debt default that almost happened earlier this year.

DISCLAIMER: The information provided in this blog post is for informational purposes only and should not be construed as financial advice. Investment decisions should be based on individual financial goals, risk tolerance, and consultation with a qualified financial professional.