Weekly Market Update

Israel has declared war on Hamas after a surprise attack on Saturday was carried out by Hamas militants from the Gaza strip, killing at least 700 Israeli soldiers and civilians. The attacks flew under the radar of Israeli intelligence, leaving Israel and their allies scrambling for answers as the coordinated attacks pierced through major checkpoints between Israel and the Gaza strip. Israel responded Sunday by killing over 400 in Gaza, with Israeli Prime Minister Benjamin Netanyahu saying his country is "embarking on a long and difficult war". It was reported that Iran helped Hamas plot the attacks on Israel. (Source: The Wall Street Journal, Associated Press)

Congress struck a deal on Saturday to avoid a government shutdown that would have gone into effect as the clock struck midnight, securing funding through mid-November. Concessions were made on both sides as House speaker Kevin McCarthy ultimately broke with his conservative wing to move forward without strict new border policies in the legislation, while democrats sacrificed $6 billion in aid for Kyiv. Republicans insist any new funding for Ukraine, which Democrats vow to pursue in a supplemental bill in the coming weeks, must be tied to new border policies and funding. (Source: The Wall Street Journal)

The price of oil quietly eclipsed $90 per barrel last week for the first time since last November. As a result, energy prices have been driving inflation modestly higher as August's Consumer Price Index (CPI) rose at an annual rate of 3.7% in August and 0.6% on a month-to-month basis, the fastest pace since mid-2022. Excluding volatile energy and food prices, core inflation rose at a more modest 0.3% on a month-to-month basis. The Federal Reserve is widely expected to keep rates unchanged after their two-day meeting this week that ends on Wednesday. The current target fed funds rate is set at a range between 5.25% and 5.50%. While the Fed is likely to pause, the European union's inflation battle rages on after the European Central Bank lifted interest rates for the tenth consecutive policy meeting, bringing key rates to their highest level since 1999.

While segments of the U.S. economy are showing signs of stress, such as the real estate market, on the whole the economy continues to defy gravity. Case-in-point, the ISM Services Index jumped to 54.5% last week (any value over 50% indicates expansion), delivering the eighth straight month of gains in the service sector and crushing economist's expectations of 52.5%. The U.S. consumer continues to spend on services despite high interest rates, growing debt levels, and depleted savings. (Source: MarketWatch) The Treasury yield curve has been inverted since July 2022. Historically, yield curve inversions have coincided with eight of the past ten recessions, yet the heavily anticipated 2023 recession has yet to arrive. Since July of this year, when the spread on 2-year and 10-year Treasuries reached a level not seen since 1981 (-1.08%), the yield curve has been steepening. This is welcome news, as stronger-than-expected economic growth data has driven longer-term yields higher. However, the yield curve remains inverted as 2-year Treasuries are yielding 4.98% while 10-year Treasuries offered 4.26% as of Friday's close. (Source: The Wall Street Journal)

The U.S. economy continues to forge ahead in the face of +5% interest rates set by the Federal Reserve. In the past few weeks, we've seen an upward revision to first quarter GDP From 1.3% to 2%, driven by consumer spending, and multiple employment reports that show the labor market remains healthy despite early signs of potential weakness. (Source: CNBC) The Fed's preferred measure of inflation, PCE, continues to moderate while still nearly double the Fed's 2% target, coming in at 3.8% for May. The Fed's continued emphasis on reining in inflation, combined with a stronger-than-expected economy, has increased the probability of another 0.25% July interest rate hike to 93% at the time of writing. (Source: The Wall Street Journal, CME FedWatch tool)

Geopolitics took center stage last week as a Russian-hired, 25,000-troop mercenary force known as the Wagner Group embarked on Moscow after tensions grew between Putin and Wagner's leader, Yevgeny Prigozhin. The Wagner Group seized the Russian city of Rostov-on-Don and shot down six Russian helicopters on their path towards Moscow before an agreement was reached. The incident heightens concern of instability in Russia and raises questions whether the highly effective Wagner Group will continue fighting alongside Russian troops in Ukraine. (Source: The Wall Street Journal)

Weekly Market Review Jerome Powell and the Federal Reserve paused the most aggressive rate hiking cycle in 50 years last week following continued improvement from May's inflation report; headline CPI is at a two-year low (4%) while core CPI, which excludes volatile energy and food prices, fell to its lowest level since November 2021. However, further rate hikes in 2023 are not out of the question; of the 18 fed officials surveyed, the median estimate was that rates would need to rise between 5.5% and 5.75% this year, suggesting two additional 0.25% rate hikes this year. (Source: Edward Jones)