Summary

It was an uninteresting day on Wall Street on Tuesday as far as trading was concerned. The Nasdaq posted modest gains as technology shares recovered from sharp losses in the prior session and comments from Fed Chair Janet Yellen increased expectations of a December rate hike.

Yellen said the Fed needs to continue gradual rate hikes and it would be imprudent to leave rates on hold until inflation reached the Fed’s 2-percent target.

Earlier in the session, Atlanta Fed Chief Raphael Bostic, a non-voting member this year, said he would want “clear evidence” that prices were firming before committing to another rate increase, but did not rule out another hike in 2017.

Chances of a rate hike in December rose to 78 percent from about 40 percent a month ago, according to CME Group’s FedWatch tool.

The day’s economic data indicated that consumer confidence fell in September while home sales fell to an eight-month low during August, due to the impact of Hurricanes Harvey and Irma.

The technology index, up 0.4 percent, was the best performing major sector, recovering somewhat from losses in the prior session. Tech shares suffered through their worst one-day decline in five weeks on Monday, as concerns over tensions with North Korea had investors moving to safety.

Apple rose 1.72 percent after four straight sessions of losses to help prop up the three major indexes, after Raymond James raised its share price target on the company to $180 from $170.

Darden Restaurants fell 6.53 percent after the Olive Garden parent said it expected the negative effects on sales and earnings from Hurricane Irma to be about double that from Hurricane Harvey.

Red Hat 4.09 percent after the Linux distributor’s quarterly earnings number came in above estimates and the company raised its full-year forecast.

Approximately 5.81 billion shares changed hands on the major domestic equity exchanges, as compared to the 5.96 billion share daily average over the last 20 trading sessions.

The Day’s Economic Data

Consumer confidence fell in September and home sales hit an eight-month low in August due to the impact of Hurricanes Harvey and Irma, supporting the view that the storms would hurt economic growth in the third quarter.

Still, relatively high levels of consumer confidence together with continued strong gains in house prices should support consumer spending and keep the economy on solid ground. Rebuilding in the hurricane-ravaged Texas and Florida also is expected to deliver an increase in the fourth quarter.

The Conference Board said on Tuesday its consumer confidence index declined to a reading of 119.8 this month from 120.4 in August, which was the highest reading in five months. It said confidence in Texas and Florida “decreased considerably.”

The survey’s so-called labor market differential, derived from data about respondents who think jobs are hard to get and those who think jobs are plentiful, slipped to 14.5 this month from 16.0 in August.

That measure, which closely correlates to the unemployment rate in the Labor Department’s employment report, remains consistent with more absorption of labor market slack.

The number of consumers expecting an improvement in their incomes rose marginally to 20.5 percent in September from 19.9 percent last month. The share expecting a decline was little changed at 8.3 percent.

Despite being near full employment, the labor market has struggled to generate strong wage growth, frustrating both consumers and policymakers. But rising home prices should continue to underpin consumer spending, even though the housing market is slowing.

The Atlanta Federal Reserve is forecasting the economy to grow at a 2.2 percent annualized rate in the third quarter, slowing from the April-June period’s brisk 3.0 percent pace.

The S&P CoreLogic Case-Shiller composite index of house prices in 20 metropolitan areas rose 5.8 percent in July on a year-on-year basis after increasing 5.6 percent in June.

The Commerce Department said new home sales fell 3.4 percent to a seasonally adjusted annual rate of 560,000 units last month, making it the lowest level since December 2016. Sales were down 1.2 percent on a year-on-year basis in August.

New home sales, which are drawn from permits, account for 9.5 percent of overall home sales. The Commerce Department suggested Harvey and Irma likely impacted new home sales data last month.

The Department indicated that, “information on the sales status at the end of August was collected for only 65 percent of cases in Texas and Florida counties” affected by the hurricanes. That compared to a normal response rate of 95 percent. Harvey weighed on retail sales and industrial production in August.

Last month, new home sales fell 4.7 percent in the South, which accounts for more than 50 percent of the new homes market. Harvey hurt sales of previously owned homes in August and held back the completion of houses under construction.

With Irma hitting Florida in September, housing market activity could remain weak. The areas in Texas and Florida affected by the storms accounted for 14 percent of single-family home permits in 2016.

The housing market was softening even before the hurricanes struck, buffeted by headwinds including shortages of homes available for sale, skilled labor and suitable land for building. Rising prices for building materials are also undercutting the market.

In August, new single-family homes sales also fell in the Northeast and West. They were unchanged in the Midwest.

Fed Chair Says It Is a Mistake to Wait

The Federal Reserve needs to continue gradual rate hikes despite broad uncertainty about the path of inflation, Fed Chair Janet Yellen said on Tuesday in remarks that acknowledged the central bank’s struggles to forecast one of its key policy objectives.

It is possible, Yellen said, that the Fed may have erred its models for inflation, and “misjudged” key facts like the underlying strength of the labor market and whether inflation expectations are as stable as they seem, and central bankers need to remain open to that possibility as they decide on policy.

Still, recent low inflation was likely a reflection of factors that would fade over time and despite uncertainties, it “would be imprudent to keep monetary policy on hold until inflation is back to 2 percent,” Yellen said in a 37-page address to the National Association for Business Economics

“Without further modest increases in the federal funds rate over time, there is a risk that the labor market could eventually become overheated, potentially creating an inflationary problem down the road that might be difficult to overcome without triggering a recession,” she said.

Yellen’s remarks attempt to resolve a debate that has split members of the central bank among those worried that inflation may be permanently anchored below the Fed’s 2 percent target because of structural changes in the global economy, and those who feel it is only a matter of time before tight labor markets lead wages and prices to rise.

She did not provide a definite answer, noting that in current forecasts there was a 30 percent chance inflation could range anywhere from 1 percent to 3 percent, vastly different outcomes either of which could rewrite the Fed’s policy approach. But she did make clear the Fed still feels a gradual pace of rate hikes remains the base case.

Yellen said she would be looking at inflation and labor market data closely in coming months to assess the outlook, but “the data is noisy and it’s not going to be a magic bullet.”

And while the timing of rate hikes may not be predictable, she said, “the path is likely to be gradual.”

Yellen walked systematically through arguments that weak inflation reflected structural changes, and largely discounted them.

There was not yet “empirical support” for the theory that global trade, worldwide supply chains, and other forces were holding down U.S. prices, she said.

Meanwhile, the Fed calculates that cyclical slack in the labor market was now having a “negligible” impact on low inflation readings, compared to oil prices and other changes that will fade. And some aspects of the labor market that appear weak, such as the still-elevated number of part-time workers, may reflect permanent changes in the workforce, and not cyclical factors, Yellen said.

There were many uncertainties, however, and downward pressure on inflation could prove unexpectedly persistent.

“My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation,” possibilities which the Fed needs to examine over time and change the course of policy if needed.

But for now, the Fed “continues to anticipate that, with gradual adjustments in the stance of monetary policy, inflation will rise and stabilize at around 2 percent over the medium term,” she said. “We should be wary of moving too gradually.”