Weekly Investment Perspective

U.S. equity markets added to their strong year-to-date performance last week amid the start of the third quarter corporate earnings season despite a hotter than anticipated inflation update that pushed long-term interest rates higher. For the week, the major indices notched similar returns as the S&P 500 and Nasdaq Composite each gained 1.1% and the Dow Jones rose 1.2%. Small cap stocks also kept pace as the Russell 2000 returned 1.0%. Meanwhile, the U.S. 10-year Treasury yield broke back above 4.0%, ending the week at 4.08% compared to 3.66% a month ago, which is a significant move for long-term rates in such a short window of time.

Last week’s release of the September Consumer Price Index report put more fuel under the sharp recent rebound in long-term rates following the surprisingly robust September jobs report. Both headline CPI and the more closely watched core CPI (which strips out volatile food and energy prices) came in above expectations with the headline figure up 2.4% year-over-year against the consensus forecast of 2.3% and the core reading accelerating to 3.3% year-over-year compared to expectations and the prior month level of 3.2%. The report showed that progress to the Fed’s 2% target remains bumpy and—alongside the strong jobs report—reduced the likelihood of another outsized 0.50% rate cut in November to almost zero. However, the report did show some promising signs of cooling in one of the most stubborn pockets of inflation as shelter prices grew just 0.2% in September after rising 0.5% in August.

In addition to the recent upward revisions in economic and inflation data, long-term expectations for economic growth and inflation are being biased higher by several other factors. The Federal Reserve’s initial rate cut of 0.50% last month signaled the central bank’s willingness to ease monetary policy more aggressively to prevent further deterioration of the labor market even with inflation still running above target. Meanwhile, government fiscal policy is expected to remain quite accommodative regardless of the result of the upcoming elections despite the rising government debt and interest expense burden.

In an environment of high government spending, easing borrowing costs, and ramping business capital investment on artificial intelligence, investors have high expectations for corporate profit growth as the third quarter earnings season kicks off. Last week’s reports from large money center banks like JP Morgan and Wells Fargo were well received by markets as they indicated stable credit quality and healthy consumer spending patterns and also got a boost from better-than-expected investment banking revenues and net interest income. The pace of earnings announcements will begin to pick up this week with a slew of other financial service companies as well as several other notable reporters including UnitedHealth, Netflix, Proctor & Gamble, and chip-manufacturing giant Taiwan Semiconductor.

Investors will also be closely monitoring this week’s reports of U.S. retail sales for more color on the consumer as well as trying to sift through weekly jobless claims, which surged last week on the back of the recent hurricane fallout in the southeast and a large strike at Boeing in the northwest. Initial jobless claims are expected to rise even further this week to 270k from 258k last week and the prior month average of 224k. Such noisy labor market readings where it is difficult to sort temporary layoffs from more lasting unemployment may complicate the economic picture for the Fed ahead of its upcoming November policy meeting.