Unadorned Notes: October 9-13, 2024
Inflation Slows, But Remains Elevated; Consumer Sentiment Declines; Jobless Claims Surge Amid Disruptions; Defense Stocks Surge Amid Tensions; Trump Proposes Car Loan Tax Deduction
Economics, Finance, and Business
Inflation Slows, But Remains Elevated: U.S. consumer prices rose 0.2% in September 2024, with annual inflation slowing to 2.4%, the smallest increase since February 2021. Core inflation, which excludes food and energy, climbed to 3.3%, higher than expected. The Federal Reserve may delay cutting interest rates, as the data suggests inflation is proving more persistent. Analysts noted that upcoming labor market data will be crucial in shaping the Fed’s future rate decisions.1
Consumer Sentiment Declines: U.S. consumer sentiment fell to 68.9 in October 2024, down from 70.1 in September 2024, according to the University of Michigan’s preliminary survey. The decline reflects ongoing frustration over high prices, despite easing inflation expectations. One-year inflation expectations rose to 2.9%, while the five-year outlook dipped slightly to 3.0%. Consumers’ views on long-term business conditions improved, reaching a six-month high, though personal financial outlooks softened. Analysts suggest uncertainty over the upcoming election may be affecting sentiment.2
U.S. Producer Prices Remain Flat: U.S. producer prices were unchanged in September 2024, as a rise in services costs was offset by a decline in goods prices, maintaining a favorable inflation outlook. The annual PPI increased 1.8%, slightly down from 1.9% in August 2024, while core PPI, excluding food and energy, rose 3.2% year-on-year. Despite higher food prices, broader inflation indicators remained subdued, supporting the view that inflationary pressures are moderating.3
Jobless Claims Surge Amid Disruptions: U.S. initial jobless claims rose sharply to 258,000, the highest level since August 2023, driven by the Boeing strike and Hurricane Helene. The disruptions could cloud labor market data through the end of the year, though the Federal Reserve is expected to discount these distortions when assessing policy. The rise in claims was also influenced by layoffs at Stellantis plants and Boeing suppliers. Continuing claims, a measure of hiring, increased by 42,000 to 1.861 million. Despite labor market volatility, economists predict the Fed will maintain its measured approach to interest rate cuts.4
U.S. Equity Funds See Outflows: U.S. equity funds experienced $342 million in outflows in the week ending October 9, 2024, driven by shifting expectations on Federal Reserve rate cuts and rising bond yields. Investors divested $4.25 billion from large-cap funds and $919 million from mid-cap funds, while adding $197 million to multi-cap and $118 million to small-cap funds. Sectoral equity funds attracted $730 million, with tech and metals & mining sectors seeing significant inflows. U.S. bond funds recorded $3.37 billion in inflows, marking the 19th consecutive week of gains. Money market funds saw a net inflow of $2.54 billion, continuing a three-week trend.5
Defense Stocks Surge Amid Tensions: Shares of defense and aerospace companies surged due to rising geopolitical tensions in the Middle East, with the S&P 500 Aerospace & Defense Index up 20% this year. Analysts point to the Federal Reserve’s easing cycle and strong commercial aircraft orders as additional catalysts for further gains. Despite high valuations, the sector is seen as a relative safe haven, with inflows into the iShares US Aerospace & Defense ETF reaching the highest since April 2024. Historical data shows defense stocks outperform the broader market during Fed easing cycles by an average of 23%. Global instability continues to drive defense spending, supporting the sector’s long-term outlook.6
Tesla Stock Falls on Robotaxi Debut: Tesla shares dropped over 7% as investors reacted to the underwhelming launch of its $30,000 fully autonomous Cybercab. Analysts expressed skepticism over Tesla’s ambitious robotaxi goals, citing a lack of feasibility and detail. Jefferies labeled the Cybercab a “toothless taxi”, while others noted the absence of concrete production timelines and market strategy. The stock decline extended Tesla’s two-week slide, exacerbated by missed delivery estimates and a recent recall. Despite some positive reactions, concerns remain about competition from ride-hailing companies like Uber and Lyft.7
Google Faces Multiple Antitrust Battles: Google is dealing with several U.S. antitrust cases affecting its app store, search engine, and digital advertising business. A court ordered Google to allow rival app platforms on Android devices and enable alternative in-app payment methods, following a lawsuit by Epic Games. The U.S. Justice Department may seek to break up parts of Google’s business over its dominance in online search, with proposals expected in November 2024. Google is also facing lawsuits over its control of the digital advertising market, with trials set for 2025. These cases could significantly impact Google’s business practices and market dominance.8
U.S. Politics, Policies, and Geopolitics
Biden Announces $612M for Florida: President Joe Biden toured hurricane-damaged areas in Florida and announced $612 million in federal funding for projects to strengthen the region’s power grid. Two of the projects, totaling $94 million, focus on enhancing Florida’s electrical infrastructure to reduce power outages during extreme weather. Gainesville Regional Utilities and Florida Power and Light will receive funding to improve grid resilience and reliability. Biden emphasized a united national response to the crisis, praising local officials and first responders. The funding is part of a broader effort to upgrade the U.S. electrical grid amid increasing climate challenges.9
Trump Proposes Car Loan Tax Deduction: Former president Donald Trump unveiled new tax proposals, including making car loan interest fully deductible, aimed at stimulating auto production and appealing to Michigan voters. He also promised to end double taxation for Americans living abroad, though details were sparse. Critics argue the car loan deduction would primarily benefit itemizers and question the feasibility of his broader tax cuts. Trump’s tax plans, including previous proposals to eliminate taxes on tips, Social Security benefits, and overtime pay, are projected to increase the national debt by $7.5 trillion over a decade. Experts remain skeptical about how these initiatives would be funded.10
U.S. Sends Anti-Missile System to Israel: The U.S. is deploying a THAAD anti-missile system and 100 troops to Israel to bolster its air defenses following recent attacks by Iran. The deployment aims to help Israel defend against potential future Iranian missile strikes, particularly in light of rising tensions between the two nations. The U.S. has advised Israel against targeting Iranian nuclear sites or oil fields in any retaliatory strikes. This is the second time the THAAD system has been deployed to Israel, following a similar exercise in 2019. The U.S. military presence in the Middle East has grown significantly since the October 2023 Hamas attack on Israel.11