by Bryan Perry
August 8, 2023
Looking at the big picture for the stock market, one mostly needs to pay close attention to the bond market. Rising bond yields pose a big challenge to the market’s leading growth companies. And though there is strong disagreement as to whether the Fed is justified in taking the Fed funds rate towards 6.0%, the FedWatchTool shows only 13% see another quarter-point hike at the September 20 FOMC meeting.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The odds of another rate hike were diminished by last Friday’s employment report, where July non-farm payrolls came in a tad light of forecast, coupled with the unemployment rate dropping to 3.5% from the 3.6% rate registered in June. That took the heat off Wednesday’s hot ADP private payrolls report that came in way above estimates (324k vs. 185k) and helped restore order from a sharp sell-off in the Treasury market that sent 5-, 10-, 20-, and 30-year yields up and through 4.0%. The benchmark 10-year T-Note touched 4.20%, the highest level since November 2022, before settling at 4.06% by week’s end.
The shifting recession narrative can be seen in 10-year T-Note yields that moved from 3.6% at the end of May to over 4% after Fed Chair Jerome Powell said, “The central bank’s staff no longer forecasts a U.S. recession, and we do have a shot for inflation to return to target levels without high levels of job losses.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
In the same breath, Powell also said that there was “a lot left to go to see such a soft landing,” seeing “a noticeable slowdown in growth starting later this year,” but “given the resilience of the economy recently” the Fed is “no longer forecasting a recession.” For further clarification, what these two charts (above) seem to imply is that while rates are normalizing, the Fed will likely pause at the September meeting and possibly raise once more in November or December if the economy continues to be resilient.
One statistic reported back on July 18 is particularly encouraging to the Fed, and to most workers: For the first time in two years, wages are finally rising faster than consumer prices, according to data from the Bureau of Labor Statistics. Average hourly pay has grown at an annual rate of 4.4% for the last three months – faster than the Consumer Price Index, which rose at a rate of 3% in June and 4% in May. This is a small win for workers, but it sends a message to the Fed that tight labor supply and solid wage growth will probably result in the Fed funds rate staying at the current 5.25% to 5.50% level for quite some time.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This assumption runs counter to the wider belief that the Fed will start cutting rates early next year, perhaps starting around March 2024. Investors will get July inflation data later this week, when the Consumer Price Index (CPI) and Producer Price Index (PPI) are released, both of which are forecast to increase by 0.2%. Here’s the schedule of releases, with the CPI and PPI released Thursday and Friday.
With food and energy prices rising this past month, a lower inflation reading will likely be the result of a softening in the shelter component and new and used car component. All major used vehicle market segments saw seasonally adjusted prices that were lower year over year in the first half of July.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Rent growth around the country is back at pre-pandemic norms — growing about 1 to 3 percent per year, according to real estate data firm CoStar Group. In some recent hot spots, including Austin and Atlanta, prices are actually falling. “The rental market is finally taking a breath,” said Igor Popov, chief economist at Apartment List. “This summer looks a lot different from the last two summers: We are getting to a more stable period, and in some parts of the country, renters are back in the driver’s seat.”
I believe the biggest reason for that slowdown is more housing being built. Nearly 1 million new apartment units — an all-time high — are under construction around the country, census data shows. Of those, 520,000 are expected to hit the market this year, with another 460,000 to follow in 2024, according to CoStar.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
New home prices are holding up even as mortgage rates trend higher, due to ongoing supply shortages, but seeing some of the air come out of the rental market is good news. There is some leveling off of price increases for home sales, up only 3.0% year-over-year. So, housing inflation is also moving down.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As of June’s reading, the core inflation rate for the U.S. stands at 4.8% and needs to come down further to enable the servicing of the massive U.S. debt that Fitch and other rating agencies see as a long-term threat, citing “failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges.”
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When asked about the timing of the downgrade, Richard Francis, a senior director at Fitch, told Reuters that the agency wanted to “take a deep look” at long-standing concerns around governance and the U.S. debt profile. “Fitch isn’t telling anybody anything they don’t already know,” said Mark Sobel, a former longtime Treasury official who is now U.S. chairman of financial think-tank OMFIF. Longer term, he said, “Neither political party has evinced the guts to begin making the sacrifices needed on both the spending and revenue sides – which will only increase as time marches on.”
Even if the Fed doesn’t raise rates further, the debt will continue to soar as existing debt is replaced with new debt serviced at higher prevailing rates. That’s why it is imperative the Fed gets rates back down. With this week’s inflation data on deck, we will know soon if lower inflation will make that possible.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
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The Bank of England Begs Ben Bernanke to Rescue Them!
Income Mail by Bryan Perry
The Great Rate Plateau Begins
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After No Recession in 45 Years – Will China’s Winning Streak End This Year?
Global Mail by Ivan Martchev
The Stock Market Sell-off Has Started, Where Could It Get To?
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Silver Linings in the Market’s Two Worst Months
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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