Weekly Newsletter: September 15, 2025
“Behind every silver lining is a dark cloud.” George Carlin could have worked on Wall Street. While most are seeing the inflation numbers as the silver lining, the dark cloud is that inflation is not getting any better. The silver lining is a Fed ready to cut interest rates this week; the dark cloud may be that the economy is worse than many think. This past week was supposed to answer plenty of questions on investors’ minds about the health of the economy and inflation. The large negative revisions to job growth on Tuesday were followed by “meh” inflation data that shows inflation has moderated some, but at 3% vs. the target of 2%. Investors are now convinced that there is plenty of room for the Fed to cut rates on Wednesday and have pushed rates lower, anticipating that event. Last year, the Fed surprised the market with an initial 50bp cut to rates, and yields rose as investors worried about persistent inflation. Today is not much different. One bit of key economic data due early in the week is retail sales. The earnings from retailers over the last few weeks were uneven but biased toward healthy spending. The report should provide clues as to whether the consumer remains confident in their situation to continue spending or has begun pulling back. All will culminate with the Fed decision on Wednesday and the more important press conference to follow. Expect to see plenty of volatility in the markets during the press conference as Powell will likely be quizzed on the strength of the economy and how they see the inflation picture. So far, they have held to temporary inflation due to tariffs, but count on plenty of questions around that thesis.
The downward revision to job growth on Tuesday was a surprise only in size. What is less certain, and will not be available until next year, is the month-to-month changes. The large revision confirmed what investors suspected: the Fed will cut at this Wednesday’s meeting. Expectations for an even larger 50bp cut started making the rounds. That changed with the inflation data. While producer prices were good, the consumer prices remained high, and worse still were the median data. This removes the large outlier data points and focuses on the middle portion of the inflation data. Rising at 3.3% and still over 3.5% for the past year, this gives little indication of a “cooling” in inflation. Even looking at the middle two-thirds of the inflation data still shows a 3%+ annual inflation print. While it may be tariffs causing the increase in prices or something entirely different, there has been little movement over the past 18 months in these inflation measures. Taking a historical look at inflation, employment, and interest rates, all look to be within historical “norms”. The average and median unemployment rate since 1948 is around 5.5%, with the lowest unemployment quartile at the current 4.3% rate. Inflation, since the start of the series in 1913, has averaged just over 3%. Even since 2000, that rate has been 2.5%. Even the 10-year yield, since 1953, has averaged 5.5%. Today’s numbers are historically low, yet investors clamor for lower rates to help a “terrible” economy.
The trend following interest rate model still points to lower rates. However, commodity prices continue to be rather firm, rising by 3.5% just since the start of the year and up over 5% from a year ago level. Worries about the inflationary impacts of tariffs may be neglecting the fact that inflation has been a “feature” of the economy ever since Covid. It is down from the over 7% rates, but “stuck” around the 3% level. Whether monetary policy can “fix” inflation by maintaining higher rates remains to be seen. Based on the experience of the past two+ years, monetary policy is not “fixing” inflation.
Technology continues to lead the markets higher. Given their large portion of the various benchmarks (35% of the SP500), it is little wonder that, as tech goes, so goes the capital-weighted indices. Since the market bottomed following “Liberation Day,” the SP500 has been over 50% better than an index that equally weights the holdings. Momentum has been especially strong, as the SP500 is now in territory that typically marks the beginning of a “cooling off” period. September is usually a month when the markets take a breather, but so far, the weak calendar is no match for the markets as they march ever higher. IF the economy demonstrates broader weakness in the months ahead, equities may follow suit and decline. As long as the data remains lukewarm, investors will see little reason to take any chips off the table.
It is all about the Fed meeting on Wednesday. Do not sleep on the retail sales figures due Tuesday, along with import prices. Both could show some impact from tariffs.
| The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions. |