Friends
We mentioned yesterday that despite the downturn in energy prices and other commodities recently, it was very possible that much of that was not going to show up in the CPI data for August. We also mentioned that other data points carry more weight such as housing. Well, the CPI number came in hotter than many had hoped. Prices were up a tenth of a percent which doesn’t sound like much, but pundits were expecting a flat number and hoping for a negative number. The year over year inflation number was a disappointment also. In addition to shelter, both food and medical care services also saw bigger price increases, offsetting those declines in gasoline prices. All of this basically assures that the Fed will raise the Fed Funds rate by .75 (or more) at next week’s FOMC meeting.
We also mentioned yesterday that there was likely to be a big reaction to today’s CPI report and by midday stocks had erased all of the gains that had occurred over the last three trading sessions. For the day, by the close the Dow Jones Industrial Average down 1276 points to finish the day at 31,104. The S&P 500 was down 177 points to close at 3,932. The Nasdaq Composite Index was down 632 points to close at 11,633. Gold was down $27.60 to trade at $1,713 per ounce, while oil was down $.32 to trade at $87.46 per barrel WTI.
The ironic thing is that today’s inflation report really wasn’t that bad in the big scheme of things. It looks like on balance that inflation is leveling off. The problem is that the markets once again were caught way offsides as market participants got caught up in a real round of wishful thinking. Also, it can be tempting to become encouraged each time the stock market rallies, but we have said all year long that this inflation fight by the Fed was going to take time to play out. One day there will be a rally that really will be the beginning of the next bull market. But until then, investor’s patience will continue to be tested.
Have a nice evening everyone.
