Weekly Newsletter: August 18, 2025
Neither CPI nor PPI nor retail sales nor a weak dollar stays the market from swift completion to all-time highs. Much like the postman, this market always delivers. The data from last week could have knocked the market down, but there was a silver lining that investors focused on that kept the good times rolling. The generally strong economic data is a sign that the economy is not slowing down and could put the Fed in a corner come their September meeting. The “dual mandate” of the Fed, stable prices and full employment, will be tested. Does the Fed focus on labor data that seems to indicate a jobs market that is faltering, or does it focus on strong consumer spending and fighting persistently higher inflation? News this week will be from their Jackson Hole, WY confab, where Chair Powell is expected to discuss “Labor Markets in Transition”. Demographics, immigration, and productivity have changed over the past decade or two, and what does that mean for employment going forward? It will be his last speech at this venue as Fed Chair, and it is possible that his focus may be more on keeping politics out of the Fed than on the labor market. What Chair Powell delivers could move markets late on Friday.
Taking the economic data at face value, it would be hard to justify a rate cut in September. First up was the consumer price index (CPI). While it was in line with expectations, the 2.7% inflation rate is still a long way from the Fed’s target. Core inflation, which strips out the more volatile food and energy component, was up just over 3% during the past year. Investors on the sunny side of the street note that the last sixmonth inflation rate is less than 1% and has been falling from nearly 2% in February. Not so friendly were producer prices (PPI), which came in well above estimates and showed signs of pressure from the imposed tariffs. Producer prices, rising by nearly 1% on the month, the fastest pace in three years, could keep the Fed from cutting rates in September. Equity investors walked on by, but bond investors took note and pushed up long-term interest rates by ten basis points on the week. Finally, a read on what consumers were doing vs. what they feel about the economy indicates they are doing just fine. Spending rose nearly 1%, due in part to a long “Amazon day” and promotions from Wal-Mart, the two top retailers. There will be plenty more economic data that gets delivered before the Fed meeting, which means heightened scrutiny of each data point.
Stocks continue to march higher, even in the face of what could be interpreted as poor economic data. The bond market did sit up and take notice and reacted to the inflation data as expected, with long-term rates rising. Short-term rates remain anchored as expectations remain high for a rate cut in September, but long-term rates tend to be more sensitive to current inflation as well as inflation expectations. Tariff talk and the impact of those tariffs on prices remain hotly debated. Are tariffs a one-time hit to prices? Who has been paying them since they were instituted in April? It is becoming evident that the tariff increases have been shared by the manufacturers, importers, and the consumer. What is less certain is how the tariffs impact inflation. That may become more evident in the months ahead.
What is becoming a broken record, the SP500 makes new all-time highs during the week, even though it took a bit of a break on Friday. Expectations that the economy remains strong enough to generate solid earnings growth, yet weak enough to cause the Fed to cut rates, is the tight rope investors continue to balance on. Overall momentum has slowed from the very frenetic pace following the “Liberation Day” bottom in April. Investors have weathered plenty of foul weather this year, so it is hard to see what could push stocks toward a more meaningful and longer-lasting correction. Any type of dip in the market, whether merely a percent or two or a deeper 10%, investors have been very willing to step up and buy. Sentiment readings indicate investors are a bit cautious, but like consumer sentiment, it is better to look at what is being done vs. what is being said. One area of the market that indicates “frothiness” is Exchange Traded Funds (ETFs) that hold one stock and deliver returns depending on whether an investor is bullish or bearish. Some are designed to deliver two times the daily move of a stock. Of all the ETFs that have been “created” this year, over a quarter of them are focused on holding only one stock. For companies that are just getting listed on an exchange, an initial public offering (IPO), ETFs are created sometimes before the underlying stock has begun trading. This gives the market a casino feel, rather than a long-term investing feel.
Central bankers from around the world converge on Jackson Hole this week. Comments from the conference, as well as the minutes from the last Fed meeting, could move markets this week.
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.