Weekly Update: Inflation Inches Higher as Earnings Growth Continues

U.S. stocks took a step back last week as investors weighed rising interest rates, higher oil prices, and continued uncertainty around the Federal Reserve. For the week, the S&P 500 declined 1.43%, the Nasdaq Composite fell 2.05%, and the Dow Jones Industrial Average lost 0.85%. Small-cap stocks also struggled, with the Russell 2000 falling 1.65%. Despite a solid rebound on Friday, the S&P 500 and Nasdaq snapped three-week winning streaks.

 

Interest Rates and Inflation Remain in Focus

Much of the market volatility centered around Treasury yields. Higher yields can create competition for stocks and put pressure on valuations, particularly for growth-oriented technology companies. Yields moved sharply in both directions during the week as investors assessed the outlook for inflation, Federal Reserve policy, and government borrowing.

 

Minutes from the Federal Reserve's July meeting also showed that policymakers have become increasingly concerned about inflation. The Fed held its benchmark interest rate at 3.50%–3.75%, but several officials favored an increase, while many others indicated that additional tightening could become necessary if inflation does not continue moving toward the Fed's 2% target.

 

Oil added another wrinkle. Crude prices climbed during the week as geopolitical tensions surrounding Iran raised concerns about global energy supplies. Brent crude rose more than 6% for the week, while U.S. crude gained nearly 6%. Higher energy prices could make the Fed's job more difficult if they begin feeding back into broader inflation.

 

The Economic Picture Was Mixed

Economic data continued to paint a picture of an economy that is growing, although not uniformly. U.S. industrial production increased 0.2% in July, with manufacturing production also rising 0.2%. Production remains 1.1% above its level from a year ago, suggesting that the industrial side of the economy continues to expand modestly. Housing was considerably weaker. Housing starts fell 12.4% in July, including a 9.9% decline in single-family construction. However, building permits increased 5%, offering some hope that the slowdown may not persist at the same pace.

The labor market, meanwhile, continues to show relatively few signs of widespread layoffs. Initial unemployment claims fell to 206,000, remaining at historically low levels even as overall hiring has slowed.

 

Perhaps the most encouraging economic news arrived Friday. S&P Global's preliminary August data showed U.S. business activity accelerating to its fastest pace since April 2022, led by a strengthening services sector. Hiring also improved, while selling-price inflation moderated somewhat.

 

The Bottom Line

The week was a reminder that markets remain caught between two competing forces. Economic growth and corporate fundamentals remain relatively resilient, but persistent inflation and higher interest rates continue to create uncertainty.

 

After a strong stretch for stocks, some volatility is not particularly surprising. For long-term investors, the bigger picture remains more important than any single week's market movement: economic activity continues to expand, the labor market remains relatively stable, and corporate earnings remain an important source of support for equities.