Market Update: August 20, 2023
Yield Curve & Retail Sales
The yield curve is one of the highlights from last week. As a reminder, a yield curve measures the value of short-term bonds vs. long-term bonds. Normal yield curves show bonds with longer duration (maturity periods) earning higher yields than bonds with shorter duration; this is considered normal because creditors earn more by lending out their money for longer periods since that constitutes more risk. But in times like these, when interest rates rise quickly, we’ve been experiencing an inverted yield curve that shows short-term bonds earning more than long-term bonds.
Retail and food service sales were up 0.7% for July 2023 following the 0.3% increase from June 2023.
Below is a graph tracking US GDP over the last few weeks and months. Each date constitutes an economic event, including press releases, reports, and public information that influences the model:
This graph is the best estimate of how GDP will respond from balancing the forecasted estimates and aiming for the median of all the estimates. If reports come in as expected, the projected GDP won’t change. If reports come in above or below what was expected, the GDP projections will adjust respectively.
On August 15, retail sales came in much better than expected which significantly raised the GDP forecast from 4.1% to 5%. The next day (August 16), the GDP forecast increased to 5.8% because of housing starts and boosts in industrial production. The residential investments part of the GDP formula grew from the new housing starts. Here’s the drawback of these results. The Fed will most likely be displeased from this data and it will likely raise inflationary pressure because it shows triple the trend growth than what was expected.
Leading Economic Indicators (LEI) & Import/Export Prices
Leading Economic Indicators (LEI) show negative reports for July 2023 for the sixteenth consecutive month, “signaling the [economic] outlook remains highly uncertain” (Conference Board). According to the Conference Board’s Leading Economic Index and Component Contributions, the only financial component still reporting positive growth is the S&P 500; it seems the Stock Market can’t be forced to read economic reports or it’s decided to totally ignore them as it continues its inflated rise fueled in large part by AI, as we’ve mentioned in weeks prior. Of the non-financial components, building permits and private housing experienced a small bump, which aligns with the data we’ve been seeing in the last few months from housing developers—you know, the ones reporting all-time highs for the last few months? Remember them? This small bump indicates things are likely changing direction in the housing sector from the previous half of the year.
For July 2023, total imports increased by 0.4% while total exports increased by 0.7%. Import and export prices for the past 12 months (shown below) show clear decline on a YoY basis with minimal increases and decreases on a MoM basis. The red line tracks the YoY percent change, while the blue areas reflect the MoM percent changes:
FOMC Minutes, Nominal Rates, & Real Rates
An excerpt from page 4 of the most recent FOMC Meeting Minutes states “Over the intermeeting period, market participants interpreted domestic economic data releases as indicating continued resilience of economic activity and some easing of inflationary pressures, and they viewed monetary policy communications as pointing to somewhat more restrictive policy than expected.” This is a relatively big sign! It means the Fed is recognizing market participants, in other words “all of us consumers,” responding to their efforts—the Market is listening!
The Minutes also reference the Treasury Departments auctioning of T-bills following the resolution of the debt ceiling, saying they were “met with robust demand.” This is one reason why short-term debt is yielding more than long-term debt, hence our inverted yield curve. In reference to the economic outlook, it was noted that July’s forecast was much stronger than June’s and “[s]ince the emergence of stress in the banking sector in mid-March, indicators of spending and real activity had come in stronger than anticipated; as a result, the staff no longer judged that the economy would enter a mild recession toward the end of the year. However, the staff continued to expect that real GDP growth in 2024 and 2025 would run below their estimate of potential output growth, leading to a small increase in the unemployment rate relative to its current level.” This represents a positive forecast, but it does signal some economic downturn, just not to the level we were originally anticipating.
Money market rates show further stabilization with minimal changes to interest rates across the board. But rates are showing increases on the capital market side, especially ones with longer duration. And money market funds continue to pull money in, seeing an increase of $39.7 billion last week: retail is up $15.61 billion and institutional increased by $24.09 billion. Much of the retail funds are attributed to government investments, like T-bills.
Housing & OAS
The Primary Mortgage Market Survey shows 30-yr. Fixed Rate Mortgages (FRM) are up to 7.09% (up 13 bps from last week) and 15-yr. FRM are at 6.46% (up 12 bps from last week).
Mortgage applications are down another 0.8% last week and homebuilders are reporting major pullbacks across the board! After consistently reporting all-time highs, home developers are reporting an average loss of 5.53%. In fact, the National Association of Home Builders (NAHB) index showed a drop from 56 to 50 in one month—this is a significant drop from its trajectory during the first half of the year. And new housing starts increased 3.9% in July, which is the factor that GDP is highly focused on.
Pay close attention this week to the earnings reports coming out, especially among those top 10 companies who have been most responsible for the Stock Market’s AI rally. We may begin to see the rally come to a close…
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.
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