This Week in Review | Global Politics, US Inflation, US Government Funding Deadline

Transcript

Don Gaston:

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few important developments you may have missed this week. What they mean for markets, and most importantly, the potential impact for investors. To stay up-to-date with our latest market insights, subscribe to our YouTube channel or visit Fisher Investments.com.

Now let's review what happened this week.

First, an update on global political developments.

It's been a busy week in global politics with developments in two major developed nations. On Sunday, we saw the resignation of the Japanese Prime Minister. That was followed by the French Prime Minister losing a confidence vote on Monday. Let's take a closer look at what happened and what it might mean for stocks.

Starting in Europe. France's government lost a confidence vote in parliament. Since many expected this outcome, markets weren't caught off guard. But this development still leaves France without a budget and at an impasse on how the government can deliver one, with its minority parties agreeing on so little. On Tuesday, French President Macron appointed France's fifth Prime Minister in less than two years. This instability in France adds a layer of political uncertainty in Europe, which could cause some short-term market volatility. However, the political reality of a deeply gridlocked government likely continues in France, which is bullish for European and global stocks.

In Japan, the prime minister resigned on Sunday. This came after a series of electoral defeats left the ruling Liberal Democratic Party without majorities in both chambers of parliament. The party's minority status made his resignation a likely outcome, mitigating much of the potential surprise factor for stocks. While we await elections to determine a successor, for investors, the most important thing is what the new prime minister can accomplish. And lacking a majority government, the answer is likely very little.

Now, political instability might sound scary for investors, but in developed markets, stocks love the gridlock such political fights typically bring.

Next, an update on US inflation.

This week we got the latest numbers on US consumer inflation, or CPI, which came in at 2.9% year over year for August, which was in line with expectations. Meanwhile, the producer price index, known as PPI, fell 0.1% month over month in August, which was well below Wall Street estimates. Some had worried that recent jumps in producer prices could signal more inflation ahead, and may jeopardize Fed rate cut plans, though the latest readings could help ease some of those worries.

Conventional wisdom says rising producer prices eventually bleed into consumer prices, making producer prices a leading indicator for consumer prices. But the data? It doesn't back up this theory. PPI is more volatile than CPI because it focuses on goods prices, which tend to swing much more than services. Case in point, PPI ran hot for a few months but has now swung to a decline. By contrast, CPI is about 60% services, which tend to be more stable.

And what about tariffs' impact on prices? Sure, tariffs can raise prices on some goods, but unless that's paired with an increase in the money supply, they're not inherently inflationary. While tariffs may increase prices here and there, the belief that tariffs are broadly inflationary overlooks a couple key things: substitution effects and the adaptability of corporations and consumers. When you look at broad measures of money supply, whether in the US, the eurozone, the United Kingdom or Japan, they're all still relatively subdued. And that, to us, likely points to muted inflation ahead.

Finally, a US government funding deadline looms.

Earlier this week, House Speaker Johnson received a list of items that the White House would like to see included in a short-term US federal government funding deal. The US is facing a potential partial federal government shutdown if Congress doesn't hammer out a new funding deal by midnight on September 30th.

Now, it isn't clear what direction funding negotiations will go from here. But more often than not, politicians use government funding deadlines as leverage in negotiations, then find a way to come to an agreement, typically at the last minute.

Uncertainty could flare and an actual shutdown could dent sentiment, but stocks usually move on quickly. Since 1976, there have been 21 US government shutdowns, with none ever having caused a bear market. While stocks can wobble a bit leading up to or during a shutdown, they usually come back strong. For investors, we suggest looking past the noise surrounding government funding deadlines, as history has shown us these perennial political fights, and even government shutdowns, don't derail stock markets.

That's it for this week.

Thanks for tuning in to This Week in Review. If you're looking for more insights, then don't miss our other series, 3 Things You Need to Know This Week, released every Monday. You can also visit FisherInvestments.com anytime for our latest thoughts on markets. Thanks again for joining us and don't forget to hit like and subscribe!