3 Things You Need to Know This Week | ECB Meeting, US Inflation, Consumer Sentiment

Transcript

Hello and welcome to 3 Things You Need to Know This Week.

This regular series helps you cut through the financial headlines and focus on what really matters for markets. For more market insights, subscribe to our YouTube channel or visit FisherInvestments.com. And with that, here are three things you need to know this week.

First, the upcoming ECB policy meeting.

On Thursday, the European Central Bank gathers for its next interest rate decision. Investors are watching closely to see if policymakers extend last month's pause or shift course, especially as long-term bond yields have risen across developed markets. Back in June, the ECB delivered its first rate hike since September 2023, responding to accelerating eurozone inflation driven largely by the Iran war and its impact on energy prices. Then, at its July meeting, all members agreed to leave rates unchanged, citing high uncertainty and the fact that the full inflationary impact of the energy shock had yet to emerge. Headlines warn of renewed bond market jitters tied to resurgent inflation and central bank tightening, but we think that misreads today's backdrop. There's little evidence broad-based inflation is at hand. Inflation is fundamentally a monetary phenomenon, and global money supply growth remains moderate. Energy-driven price spikes tend to be temporary, not the start of a sustained inflationary trend. To us, the real risk isn't inflation itself. It's whether the ECB and other central banks overshoot by hiking aggressively for the wrong reasons and end up inverting the yield curve. Right now, the global yield curve remains positive and has actually steepened in recent months. That's good news because a steeper yield curve supports lending activity and healthy corporate fundamentals. Should one occur, a single incremental rate move is unlikely to change that picture. A string of aggressive hikes could, but that isn't expected today.

Next up, US inflation.

This Friday, investors get their next major pulse check on inflation. When the US Bureau of Labor Statistics releases the Consumer Price Index for August. Some are watching closely to see whether the recent cooling trend holds. July's report showed headline CPI slowed for a second straight month, easing to 3.4% year-over-year. Since the Iran war broke out, energy price increases have been the primary focus of nearly every inflation report. Headlines insist elevated inflation is here to stay, and in response, some central banks around the world have raised interest rates, hoping to get ahead of what they see as an inflation comeback. To us, central bankers and financial pundits aren't reading the room correctly. They treat inflation as though it's fundamentally driven by energy supply constraints. Sure, energy supply constraints can temporarily push up the price of certain goods. That part is real. But as we mentioned a few minutes ago, to get genuine runaway inflation, you need sustained growth in the money supply. Right now, global money supply growth remains moderate, nowhere near the levels we saw during the pandemic era. That suggests energy-related pressures should continue fading over time rather than settling in as lasting inflation.

Finally, US consumer sentiment.

This Friday, the University of Michigan releases its preliminary September consumer sentiment reading, and many investors are bracing for another downbeat report. Consumer sentiment has fluctuated in recent months, but has generally trended down since the beginning of 2024. The University of Michigan's final August reading came in to 51.7, down roughly 6% from July's 55.2 and about 11% below where it stood a year ago. That kind of pessimism can sound alarming, but sentiment tends to move alongside stocks and the general tone of financial news. Given the market swings and geopolitical headlines we've navigated this year, some weakness in confidence isn't surprising. It reflects how people feel, not necessarily how the economy or corporate America is actually performing. The disconnect between sentiment and reality is well documented. Consumers have reported feeling gloomy for long stretches, even as GDP kept growing, employment held up and corporate earnings advanced. Stocks tend to move on the gap between what people expect and what reality actually delivers. That's exactly where weak sentiment can work in your favor. When expectations are low, the bar for reality to clear sits low too. Modest economic resilience, steady earnings growth or any easing of headline fears can turn into a positive surprise, and surprises are what move markets most. So as Friday's report crosses the wires, resist the urge to read it as a market forecast.

And that's it for this episode of 3 Things You Need to Know This Week.

For more of our market views, check out This Week in Review, released every Friday, or visit FisherInvestments.com. Thanks for watching, and don't forget to like and subscribe.