Last week, the S&P 500 (NYSEARCA:SPY) rose every day of the week, closing up 1.16% despite two tragic anniversaries - the 9/11 observance and the 10th anniversary of the 2008 market crash. Like every 9/11 anniversary, I am relieved that there has not been another major terrorist attack on U.S. soil, but I must say the financial media's coverage of the cause behind the 2008 financial crash has been pathetic, since they fail to account for the government's role in causing and then exacerbating the crisis. I did my best to name names and reveal exactly what happened in my white paper, "Did the Government Really Cause the 2008 Crash?"
This report lays out the chain of events that triggered the collapse of Bear Stearns and Lehman Brothers, as well as why Citigroup (NYSE:C) eventually was deemed "too big to fail." Furthermore, this white paper discusses the biggest risk to financial markets since 2008, including the August 2015 intraday "flash crash."
Inflation Remains Subdued, Despite Oil's Price Rise
The news on the inflation front last week was very encouraging. On Wednesday, the Labor Department announced that the Producer Price Index (PPI) declined 0.1% in August, which came as a big surprise, since economists' consensus estimate was for a 0.2% increase. This is the first drop in the PPI in 18 months. In the past 12 months, the PPI decelerated to a 2.8% annual pace, down from a 3.3% annual pace in July. The core PPI, excluding food, energy, and trade, rose 0.1% and 2.9% in the past 12 months.
Then, on Thursday, the Labor Department announced that the Consumer Price Index (CPI) rose 0.2% in August, below economists' consensus estimate of a 0.3% increase. The core CPI, excluding food and energy, rose 0.1% in August. In the past 12 months, the core CPI rose 2.2%. This deceleration from a 2.4% rate last month caused Treasury yields to moderate a bit. The fact that inflation is moderating is just another reason why I think that the Fed will pause in raising key interest rates after its meeting next week.
Brent crude oil prices touched $80 per barrel last week over concerns that global inventories are rapidly shrinking. The mounting U.S. pressure on Iran via sanctions and the fact that U.S. crude oil inventories are now at a 3½-year low is contributing to the supply fears. Furthermore, Hurricane Florence temporarily disrupted East Coast supplies, which could keep crude oil prices high. Russia and Saudi Arabia have yet to significantly boost their crude oil production, which is another reason for escalating supply concerns.
I am not concerned, as supplies usually decline in the fall, and they usually emerge as prices rise. In today's world, we also know that Iran has been hiding crude oil offshore in tankers, as has Venezuela, in a futile attempt to try to transfer crude oil at sea to circumvent sanctions. I suspect that the U.S. will get more assertive with both Iran and Venezuela after the mid-term elections, since they actively are trying to circumvent sanctions. All this chaos around the world effectively guarantees that the U.S. dollar will remain strong, since it is a reserve currency that is benefitting from ongoing global capital flight.
The Other Economic News Should Cause the Fed to Be "Cautious" Next Week
Moderate inflation is one reason the Fed may not be motivated to raise rates after next week's pro forma rate increase. The Fed's Beige Book survey was released last Wednesday in time for its upcoming FOMC meeting. Essentially, the Beige Book survey cited "moderate" economic growth and expressed multiple concerns about trade and tariffs. According to the Beige Book, some businesses have postponed new investments due to rising trade tensions. In its best "double speak," the Beige Book also said that the impact of tariffs has been "minimal." Overall, this mixed message within the Beige Book is expected to cause the upcoming FOMC statement to say that monetary policy after its next rate hike will move from "accommodative" to "neutral," and that any further interest rate increases will be "gradual."
On Tuesday, the NFIB Small Business Optimism Index for August surged to 108.8, up from 107.9 in July and the highest reading in the 45-year history of the survey. NFIB President and CEO Juanita D. Duggan said, "Today's groundbreaking numbers are demonstrative of what I'm hearing every day from small business owners - that business is booming." Since small businesses are happy, GDP growth is expected to continue strong. The Atlanta Fed is now estimating third-quarter GDP at a 4.4% annual pace.
The Commerce Department on Friday announced that retail sales rose only 0.1% in August, which was substantially below economists' consensus estimate of 0.4% and the slowest pace in six months. But the good news was that July's retail sales were revised up to a 0.7% increase from 0.5% previously estimated. These increases may seem small, but they are month-over-month figures (0.7% is an 8.4% annual rate). Excluding vehicles, retail sales rose 0.3% in August and 0.8% in July, so these numbers are very healthy when annualized. In the past 12 months, retail sales have risen at a very healthy 6.6% annual pace.
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