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From complacent to volatile in a day

Nothing like going from quiet and boring to wild and woolly. The lack of volatility that traders had been complaining about in August turned on a dime early in September. The three key stock indices fell close to two percent in one day, the Dow Index experienced triple digit up and down swings for three days and the 10-year Treasury note yield reached the highest level since June. All in all, it was the worst performance of the financial markets since June’s Brexit event.

The turmoil in the financial markets was fueled initially by comments from once dovish Federal Reserve members who seem to be leaning towards the need to raise interest rates. Then came remarks by another FOMC member who reiterated her long-standing opinion that the need to raise rates "preemptively is less compelling." All of this came in the shadow of the European Central Bank not announcing an extension of their current stimulus program. The market was in complete confusion. To top it off, disappointing demand for this week’s 30-year Treasury auction threw the long end of the yield curve into major correction mode – yields rose as investors began to give in to the idea that maybe, just maybe, longer dated Treasuries are overvalued and yields are artificially too low. The economic data received at the end of the week pushed fed funds futures prediction for a rate move next week from 30 percent to 20 percent. The chance for a December move is barely above 50 percent.

Other Key Indicators this Week:

Retail Sales – The consumer was out shopping for clothes and groceries in August, but little else. Overall retail sales fell 0.3 percent, the first decline in five months. Auto sales declined 0.9 percent, in line with the weakening month-to-month sales data we have been seeing from auto dealers. Seven of the 12 categories posted falling sales. Sales in the three key months of summer this year were the weakest since the summer of 2008.

Inflation – Consumer and wholesale prices moved at different paces in August. Wholesale prices were unchanged, while prices at the consumer level rose 0.2 percent. Year-over-year core consumer prices returned to a gain of 2.3 percent, but many economists are doubtful this level can be sustained. Lower fuel and food costs for a second month kept the wholesale index lower than expected. The rising cost of energy services is offsetting the drop in energy goods prices on the consumer side.

Industrial Production – Total industrial production fell 0.4 percent in August, a sharper decline than expected. Factory production was down 0.4 percent, the largest decline since March. Utility output fell 1.4 percent, also the largest drop since March. The shining spot in the index was a gain of 1.0 percent in mining. The fourth monthly gain in mining reflects some stabilization in the price of oil.

Strategically for Credit Unions:

Sit tight until Wednesday’s press release from the Federal Open Market Committee. The committee has repeatedly stated it considers all economic data when deciding any changes to monetary policy. That being said, the data in the past few weeks errs on the side of a sluggish economy that may still need more stimulus, at least from the point of view of the committee. The consensus is for no change at Wednesday’s meeting. Interest rates may have moved up too early…stay tuned.

Sarina Freedland – Senior Investment Officer



Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.


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