Inflation & Moody's Downgrade In Market Focus

Markets were mixed last week as inflation numbers and Moody's downgrade of select banks moved markets were the focus.

The inflation numbers didn’t come in as hot as expected last week, which renewed hopes that the Fed may be done raising rates. The Fed Futures currently point to an 88% probability of no rate hike at the September meeting. In fact, Goldman Sachs sees the Fed declaring by November that a “moderation in inflation means that a final rate hike would be unnecessary.” This would be a relief for consumers who are just now seeing the benefits of wage growth out-pacing inflation. The good news on inflation was offset last week by the downgrade by Moody’s of several key regional banks a few large banks being put on notice for a potential downgrade. We would be remiss if we didn’t remind investors that the Fed conducted stress tests on 23 banks back in June. All 23 banks passed and among those were some of the banks that Moody’s either downgraded or put on notice.

A measure of the U.S. consumer and economic conditions is the Misery Index—a combination of inflation and the unemployment rate.

The current level of the Misery Index is 6.7, which is well below the historical average. At the same time, financial conditions continue to show a stable environment for investors. Bear market proponents point to single data points that, when taken by themselves, could be worrisome. However, if we look at a holistic indicator - the Fed's National Financial Conditions Index - conditions are "loose" and supportive of further economic growth. Retail Sales to be released tomorrow, are expected to come in higher for July. That data plus big box retail earnings could drive markets this week.

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