Nominal Rates & the Fed
The Fed implemented their 25 basis point (bps) rate hike, bringing the targeted range to 5.25% - 5.50%. But money market rates seem mostly unaffected, as if they’d already priced in the recent rate hike. Capital market rates increased for bonds with longer duration (7-year and above). The next Fed (FOMC) meeting won’t be until September 20, and predictions currently stand with the Fed likely pausing or skipping a rate hike during their next session.
Total money market fund assets increased by a whopping $28.35 billion: retail increased by $4.01 billion and institutional rose by $24.34 billion. This could likely be due to money moving rapidly at the month’s end, but last week’s rate hike could also have had some influence. The main highlight was on the institutional side, as government money market funds grew by over $25 billion. It appears that funds are taking shelter from equities and the Stock Market (again) under the safety of the money market. These shifts can seem random or hard to track, and you may be wondering “What causes these ebbs and flows of money on large scales?” The short answer is monetary policy.
Monetary policy, which is regulated by the Fed, comes with an inherent drawback: the effects of their decision-making aren’t immediately felt throughout the economy. There are lagging effects that are felt over time, since their decisions travel through the banking and loan sectors, into businesses and housing, then into the consumer market and beyond. So an interest rate hike from 6 months ago likely won’t be felt by most consumers for another 3 months or so. It’s important to keep this top of mind when navigating the news headlines and consumer sentiment, since many people are underestimating the efforts of the Fed based on current market data.
Jobs Data
In this new phase of the business cycle, inflation and interest rates will take a bit of a backseat; they’re still important factors to consider, but most of their function has been served, and now our attention is best focused on labor and jobs data. This week will witness the release of lots of jobs data, which will better inform us about where we are in our recessionary journey.
Our first preview is from the Employment Cost Index, which tracks the progress of compensation among different employment sectors. In all sectors, June 2023 shows an increase in real earnings. In our daily lives, this translates into higher paychecks for more American workers without an increase in hours worked or productivity. And typically, this also translates into more money with which to consume goods and services.
Real Rates, Federal Funds Rate, and TLT
Real rates inching back up last week, with rates increasing across the board.
Very little change with the federal fund futures (FFF); projections still show rates bottoming out in November/December, then slightly increasing again in the first half of 2024. But with strong consistent data, we should see those increases flatten out as we finish the year.
TLT, the major long-term bond ETF index, is down 1.46%.
Housing & OAS
The Primary Mortgage Market Survey shows 30-yr. Fixed Rate Mortgages (FRM) are up to 6.81% (up 3 bps from last week) and 15-yr. FRM are at 6.11% (up 5 bps from last week).
- Mortgage applications are down 1.8%
- New home sales are down 2.5% (June)
- Pending home sales up 0.3% (month-over-month)
- Pending home sales down 15.6% (year-over-year)
As a reminder, “month-over-month” indicates monthly changes (Ex: comparing May 2023 to June 2023 to July 2023…), while “year-over-year” indicates changes from the same time during previous years (Ex: comparing May 2021 to May 2022 to May 2023…).
Home developers are still reporting gains, but at smaller rates; remember, most of these home builders are experiencing year-to-date highs, or in some cases all-time highs. New home developers are experiencing a unique period where competition has waned, since they don’t have to compete with existing home sales, so they’re taking advantage of the high yields they can earn. But this trend will end when mortgage rates come down, and home developer know this! So as long as mortgage rates remain high, we can expect these yields to continue rising.
US Dollar, Canadian Dollar, & Japanese Yen
The US Dollar experienced a major boost in strength last week. Here are some data points that help explain this boost:
Canada’s preliminary GDP report for June is -0.2% following May’s 0.3% increase, signifying negative growth.
Overall, the US Dollar strengthens against the Euro, while the Canadian dollar remains weak to the US Dollar, and the Japanese Yen experiences little to no change in strength.
Q2 GDP
Gross Domestic Product (GDP) came in at +2.4%, but this number is problematic. GDP is a composite measurement, made up of consumer spending (C), institutional spending (I), government spending (G), and the sum of exports (X) minus imports (M). The formula looks something like this:
And here was the breakdown of each piece…
- Consumer spending (C): came in at 1.12; this represents 46% of last quarter’s GDP, much lower than average consumer spending, which normally makes up about 70% of GDP. This is very low!
- Institutional spending (I): came in at 0.97; this number is strong, made up mostly of fixed income investments.
- Government spending (G): came in at 0.45; state and local government spending did most of the heavy lifting, making up more than 6 times the amount of federal spending.
- Exports (X) – Imports (M): came in at -0.12; a negative trade balance means we imported more than we exported.
The most alarming aspect of this report is the drop in consumer spending. The US economy is set up in a fashion that expects the consumer piece of the GDP puzzle to be much larger; it helps keep money flowing through the market and we rely on consumer spending habits to fuel the economy. We can’t ignore the influence of inflation, which has dampened consumer spending. And while recent reports show inflation slowing down, it may not be slowing down quickly enough to boost spending from most American consumers.
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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