Inflation continues to move lower toward the Federal Reserve’s 2.0% target while consumer sentiment is improving, which bodes well for future spending growth.

Highlights for This Week Include:

  • Inflation continues to move lower toward the Federal Reserve’s 2.0% target while consumer sentiment is improving, which bodes well for future spending growth.
  • While the labor market has cooled from historically tight conditions, it remains consistent with job growth, which should continue supporting the economic expansion.
  • Stocks ended the third quarter at all-time highs, with encouraging broad participation across sectors. Further economic growth, supported by lower inflation and interest rates, should continue supporting profit growth and, ultimately, stock prices.

Inflation Moving Closer to the Fed’s Target while Consumer Sentiment Improves: The Federal Reserve’s (Fed) preferred inflation measure, the personal consumption expenditures (PCE) price index, showed inflation moving closer to the Fed’s 2.0% target in August, justifying the Fed’s shift to lowering interest rates. Both headline and core (excludes volatile food and energy) PCE prices rose 0.1% from the prior month, with the core surprising to the downside. Annual headline PCE inflation slid to 2.2%, driven by cheaper energy. Core PCE inflation edged up marginally to 2.7% but has shown little change in the past four months. Still elevated inflation rates in housing and other core services have been offset by continued deflation in core goods prices.

Both headline and core PCE inflation rates are near their lowest levels since early 2021. Current inflation trends create room for further rate cuts to support the economy and labor market, rather than pursuing high rates to restrain economic activity to cool inflation.

Personal income and personal consumption expenditures (PCE) each rose by 0.2% in August and have shown signs of moderating over the course of this year. Income growth was driven by stronger wage and salary compensation, a testament to a still healthy labor market, despite recent softening. Consumer spending was driven by services, led by housing and recreation. Income growth is the main driver behind solid consumer spending growth, keeping the broad economic expansion going.

The University of Michigan Consumer Sentiment Index showed improvement over its mid-September estimate and rose to its highest reading in five months, with both current conditions and consumer expectations rising. The report noted broad-based improvement in sentiment, including across political affiliations. This bodes well for consumer spending growth in the near term.

Labor Market Softer but Still Healthy

The Job Openings and Labor Turnover Survey (JOLTS) report showed job openings picked up in August to a better-than-expected 8.0 million, led by increases in construction and state and local government postings. This resulted in a modest uplift in the job openings-to-unemployed ratio to 1.13. This level continues to reflect near balanced labor demand/supply conditions, following extreme labor shortages earlier in this cycle. The layoff rate was little changed near historic lows, as employers continue to hold on to their workers.

Other data in the JOLTS report showed more weakness. The hires rate dipped to 3.3%, matching its lowest level in this cycle. The quit rate also fell, down to 1.9%. Excluding the pandemic, this was its lowest level since 2015, as workers’ confidence in their job prospects has fallen.

Adding to mixed labor market signals, the ADP payrolls report showed job creation in the private sector accelerated in September. ADP payrolls gained a stronger-than-expected 143,000, the most in three months.

Jobless claims, a timely and accurate economic indicator, remain consistent with a healthy labor market and further economic growth. Claims remain well within their range since late 2021.

All of this is consistent with a labor market that has softened but is still growing, consistent with further economic growth and lower inflation.

Thoughts On Recent Market Dynamics

Stocks overcame early August’s volatility and reacted favorably to September’s 0.50% Fed interest rate cut to end the third quarter at record highs with broad-based gains. The S&P 500 added 5.9% on a total return basis in the third quarter, led by the bond surrogate Utilities (+19.4%) and Real Estate (+17.2%) sectors. In a positive sign of broad participation, every sector posted positive returns in the quarter except for Energy (-2.3%).

Falling inflation over the past two years and now lowering of interest rates are important drivers of the current bull market. Strong economic growth that has supported profit growth is also an important driver. These factors are why we put such an emphasis on analyzing economic and inflation signals to formulate our outlook for stocks and other assets.

Given the positive economic growth, coupled with falling inflation and now interest rates, that we continue to see and the fact that corporate profits and future estimates remain sturdy, we remain encouraged by the recent market action.

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor.

About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/