Monthly Economic and Market Summary

• Markets Declined in September - Financial markets weakened in September as rising inflation concerns and interest rates pressured both stocks and bonds. The S&P 500 fell a modest 0.35%, while the S&P 600 Small Cap Index declined 5.6%. In the fixed income markets, the Bloomberg Intermediate Gov/Credit Bond Index declined 1.66% as bond prices moved lower and yields drifted higher. The 10-year Treasury yield rose to a multidecade high on the final trading day of September reaching 5.304%, its highest level since May 2002.

• Consumer Confidence Deteriorated – The Consumer Confidence Survey, as reported by the Conference Board, deteriorated in September, with the headline index falling 6.7 points from the prior month to a reading of 81.9, substantially below the 89.2 economists had expected and the weakest reading in over 12 years. The decline was driven primarily by worsening labor market perceptions, elevated living costs, higher energy prices and rising borrowing costs.

• Manufacturing Continued to Expand – The ISM Manufacturing PMI held steady at 54.5 for September but was slightly lower than the consensus expectation of 55. New orders accelerated, but prices paid increased sharply due to ongoing inflation pressures. A reading above 50 indicates expansion in the manufacturing sector.

• Inflation Less than Expected – Inflation, as measured by the Personal Consumption Expenditures (PCE) Index, the Federal Reserve’s preferred inflation gauge, rose less than consensus expectations. The PCE index increased 3.4% year over year in August, below consensus of 3.7%. The softer inflation reading provides the Federal Reserve with greater flexibility to pause interest rate increases at the October meeting

• Payroll Hiring Slowed - September payrolls rose by just 29,000, falling short of expectations for 90,000 new jobs, and employment gains from the prior two months were revised lower by a combined 60,000. The unemployment rate ticked up to 4.2%. Despite the weak hiring data, rising labor force participation, solid household employment and limited layoffs suggest the labor market remains characterized by a “low-hire, lowfire” environment.

Fed turns hawkish in an effort to curb inflation

Taking a more restrictive stance, the Federal Reserve raised its benchmark interest rate by 25 basis points in September, lifting the federal funds target range to 3.75% to 4.00% in an effort to curb inflation, which remains above the Fed’s 2.0% objective. Recently appointed Fed Chair Kevin Warsh characterized the Fed’s action as “removing a dose of accommodation” and cited persistent price pressures and continued resilience of the U.S. economy as key reasons for tightening monetary policy. While economic growth and labor market conditions remain relatively strong, Fed officials emphasized that inflation continues to run above levels consistent with long-term price stability.

Inflation has proven to be “sticky”. Consumer price data have shown headline inflation running in the mid3% range, well above the 2.0% objective, despite numerous rate hikes in 2022 and 2023. A recent contributor to inflation has been the rise in energy costs, particularly gasoline prices, which have risen sharply amid the conflict in Iran. Higher energy prices tend to have a broad impact across a range of goods and services in the economy, making inflation more difficult to contain.

Beyond energy markets, the growing U.S. federal budget deficit, as shown in the chart below, may be another factor contributing to ongoing inflation pressures. Large federal borrowing requirements and government debt-servicing costs, which are estimated to exceed $1.0 trillion this year, can contribute to upward pressure on interest rates. Combined with elevated energy prices and a strong domestic economy, persistent fiscal deficits may further complicate the Fed's efforts to restrain inflation.

As a result, policymakers are likely to remain cautious and maintain a hawkish stance until there is clearer evidence that underlying inflation is moving sustainably back toward the 2.0% goal. Current market expectations are for at least one more rate hike by year-end, suggesting more monetary tightening is yet to come.

Sources: BEA, Congressional Budget Office (CBO), Treasury Department. and J.P. Morgan Asset Management