Last Week’s Markets in Review: Markets Digest Inflation and Geopolitical Turmoil

Global equity markets finished mixed for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,328, representing an increase of 0.47%, while the Russell Midcap Index moved 0.33% last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -1.47% over the week. As developed international equity performance and emerging markets were higher, returning 0.97% and 1.52%, respectively. Finally, the 10-year U.S. Treasury yield moved lower, closing the week at 4.61%.

Last week saw an unusual number of meaningful events that will likely affect the economy and financial markets in the weeks and months ahead. The week began with the outbreak of war in the Middle East. Markets watched closely throughout the week as the conflict between Israel and Hamas developed. Market participants also were interested in two inflation reports and comments from several Federal Reserve officials. In addition, the U.S. House of Representatives continues to search for a Speaker to replace Representative McCarthy. Lastly, corporations began to report their third-quarter earnings.

Aside from the devastating human toll, the unfolding conflict between Israel and Hamas also had financial markets weighing how a war in the Middle East may impact the Federal Reserve’s next policy steps. Throughout the week, markets remained volatile, digesting the initial market movements caused by the Middle East conflict. Will this conflict cause the Fed to be more dovish to not let the conflict cause the U.S. economy to move into a recession, or will a potential increase in oil prices caused by the conflict cause a resurgence in inflation, requiring the Fed to continue to increase interest rates? Time will tell, but the escalating conflict will certainly be a Fed consideration for the balance of the year.

Economic data that gauges domestic inflation was released last week. On Wednesday, the Bureau of Labor Statistics (BLS) released the September Producer Price Index (PPI). PPI recorded a 0.5% gain for the month, down from the 0.7% increase in August. The 0.5% gain was higher than the consensus estimates of 0.3%. Year-over-year PPI rose 2.2%. The September Consumer Price Index (CPI) followed the PPI on Thursday. Headline CPI rose a larger-than-expected 0.4% month over month in September, with more than half of the gains stemming from elevated shelter cost increases and about a quarter of the headline advance stemming from persistently elevated gasoline prices. Core CPI rose a more moderate 0.3% with an encouraging fallback in core goods prices but pesky persistence in core services prices excluding shelter costs. As a result, headline CPI inflation remained flat at 3.7% while core CPI inflation moderated 0.2 percentage points (ppt) to 4.1% — its slowest pace since September 2021.

Also, during the week, several Federal Reserve Officials suggested that the central bank may leave interest rates unchanged at its next meeting on November 1st. Both the Vice Chair, Philip Jefferson, and Dallas President, Lorrie Logan, suggested that the Fed will pause again at the next meeting.

The U.S. House of Representatives remains in a state of flux. The Republican House members have been unable to elect a new Speaker. Without a Speaker, the House is unable to conduct any legislative business. Representative Jim Jordan is currently trying to garner the needed votes to become the next Speaker.

The week ended with the Nation’s major banks announcing their corporate results for the 3rd quarter. These earnings were better than estimates across the board. Quarterly earnings are an important gauge of the economy’s strength, particularly in the Financials sector. We intend to keep our readers updated on earnings in the coming Market Updates.

Best wishes for the week ahead!

Both PPI and CPI data are sourced from The Bureau of Labor Statistics. GDP and PCE data are sourced from the U.S. Bureau of Economic Analysis. Weekly Jobless Claims are sourced from the Labor Department. Equity Market, Fixed Income returns, and rates are from Bloomberg as of 10/13/23. Economic Calendar Data from Econoday as of 10/13/23. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.