Market Update, April 30, 2023

This newsletter is a synopsis of a continual series of updates by a market analyst Mark Meldrum. Mark Meldrum is a CFA that provides weekly updates on the market, but they tend to be an hour long. Here is a synopsis of his video found here.

GDP Release Underscores Fears in Borrowing

Last week’s GDP reports point at the same weakening in institutional borrowing. Many American businesses, small and large, rely on the power and availability of borrowing, but increasing interest rates and crowded inventory are making borrowing a more costly endeavor. This is the latest of many economic reports that raise concern about credit in the US.

Interest Rates

• The 1-month Treasury, which was down 93 basis points (bps) last week, recovered and jumped back 99 bps this week to finish at 4.35%!
• Lots of volatility around the 1-month, but well below the Fed’s targeted rate range. As a reminder, this week is the next FOMC Meeting where the Fed will be raising the target rate range to 5-5.25%. Currently, the 2-month, 3-month, 4-month, and 6-month Treasuries all fit within that target range.
• Capital market rates are indicating that something is near to breaking.
• Money market funds were down last week, which is typical for the tax week each year; this week, money market funds rebounded by almost $54 billion.

FOMC Meeting (May 3)

• Today is the Fed’s meeting where they’ll (most likely) announce a 25 bps rate increase. This isn’t Earth-shattering news, especially if you’ve been reading our Weekly Newsletter. But now the attention for most analysts is on the June 14 meeting, and the highest likelihood is a subsequent 25 bps rate increase.
• We have a Jobs Report coming for Canada and the US on Friday, May 5^th.
• Real yields and breakeven rates—nothing to see here.
• Ironically, volatility among Treasuries is higher than equities.

Meldrum provides a brief overview about the race between wages and available housing. As of the last week, wages are increasing across goods-producing industries and service-producing industries, but Meldrum still believes “wages still have a long way to go to catch up to where housing can be affordable for the average income earner.”

Mortgages and Housing

According to the Primary Mortgage Market Survey, 30-yr. Fixed Rate Mortgages (FRM) are at 6.43% (up just 4 bps from last week) and 15-yr. FRM are at 5.71% (down just 5 bps from last week).

The Arbor Realty Trust (ABR), a multi-family loan and commercial mortgage lender, was up 10% this week, after a 3.5% gain the previous week. They serve as a major indicator of mortgages and accompanying volatility in the housing sector. And they’ll be reporting their quarterly earnings on May 5^th before the opening bell.

Some housing numbers were released for March and April:

• New Home Sales for March (month-over-month): up 9.6% (estimated 1.1%)—much higher than expected.
• Mortgage Applications (month-over-month): up 3.7% as of April 21^st reports
• Pending Home Sales for March (year-over-year): down 23.2% (previous year was down 21.2%)
• Multiple home builder shares report an average of 3.9% increase, the highest up 7.7%

GDP

Gross Domestic Product (GDP) measures the total of consumer spending, institutional spending, government spending, and net exports for a country’s fiscal year:

GDP = Consumer GDP + Institutional GDP + Gov’t GDP + (Exports – Imports)

Most recent GDP reported last Wednesday at 1.1% total, broken down below:

• Consumer GDP: Positive overall (2.48%)
• Institutional GDP: Negative overall (-2.34%)
  • Mostly attributed to inventory carried by businesses for longer than anticipated.
  • This can be costly to companies like Target and Walmart, who have historically slashed their prices on goods that are overpopulating their inventory.
  • In climates where money market rates are higher, inventory becomes expensive to carry for too long.
• Government GDP: Positive overall (0.81%), but wondering whether the debt ceiling crisis will have a negative effect on Q2.
• Net Exports: Positive (0.11%)

Reports demonstrate that consumers are spending at a high rate (no shocker there), so there’s no doubt in the anticipated consumer rates. Meldrum identifies the two biggest threats to GDP possibly coming from institutional investment and a reduction in borrowing.

Earnings Reports

This week is a big week for several large companies who will be releasing their earnings reports. Several Consumer Discretionary businesses, energy companies, financial companies, healthcare providers, and many others will report on their Q1 earnings and projected Q2 earnings. These announcements will definitely have some impacts on equities, so be sure to stay tuned to your stocks app!

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