U.S. equity market indexes gave up some of their gains on Friday, ending mostly flat for the day. The Nasdaq Composite was just above zero at 0.33%. The S&P 500 was basically neutral, ending the day up 0.03%. The Dow Jones Industrial Average fell slightly for the day, closing down 0.10% with the index’s greatest losses from Pfizer (PFE, Financial) and Wal-Mart (WMT, Financial).
On Friday, the Bureau of Economic Analysis (BEA) released its Personal Income and Outlays report which fell slightly below estimates having a negative effect on broad market valuations for the day. Consumer spending was slightly disappointing at a 0.3% increase from June, falling below economists’ average projection of 0.4%. The month’s inflation measure also showed that price pressures continue to have a negative effect on price stability.
The inflation reading for July showed the 12-month PCE Price Index at 0.3%, unchanged from June. When excluding for food and energy, the 12-month PCE Price Index was down 0.1% from June at 1.2%. The PCE Price Index’s lack of movement towards the Federal Reserve’s inflation objective in July further signals that oil prices and the strong dollar are real factors that continue to weigh on the U.S. economy. The BEA’s July Personal Income and Outlays report is the last one before the Federal Reserve’s Sept. 16 to 17 meeting. Given August’s global market activity, which included new lows for oil and a general devaluation in global currencies overall, it is probably not likely that inflation measures will improve much in the near-term.
The lack of progress towards the Federal Reserve’s 2% objective changes the September meeting focus from an interest rate increase to the Federal Reserve’s projections for inflation. In its most recent projections, the Federal Reserve’s Federal Open Market Committee was calling for the inflation measure to increase to 0.6% to 0.8% in 2015. Considering July’s report with August’s oil price levels and global market devaluations, the Fed’s projections are likely to show decreased estimates for inflation through 2016. With the added emphasis on price stability in the current market environment and the lack of price stability progress shown in recent inflation data, it appears that the Fed is less likely to increase the federal funds rate in September, and if they do increase the rate, it will most likely only be marginal.
Despite Friday’s losses, U.S. market indexes ended higher for the week. The Nasdaq Composite gained 2.58%. The S&P 500 added 0.89%. The Dow Jones Industrial Average was up 1.09% led by Walt Disney Company (DIS, Financial) and Intel (INTC, Financial). Overall, it appears the market’s recent selloff helped to factor in some of the global currency devaluation effects while also pushing out effects from a federal funds rate increase further onto the horizon.
Insight from the weekend’s Jackson Hole Symposium could also further help to relieve some market uncertainty around Fed policy. In an interview at Jackson Hole with CNBC, Stanley Fischer acknowledged that China’s economic issues and specifically its currency devaluation could have an impact on Fed policy decisions.
