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.
Nominal Rates
Focus is shifting away from interest rates because the market seems less concerned about rates, overall. Money market rates have settled down a bit: the 1-month through the 6-month Treasuries are all orbiting securely around the targeted interest rate range (5% - 5.25%). Total money market fund assets increased by $36 billion to $5.46 trillion. And capital market rates are slowly improving.
Yesterday, May CPI reports released and showed inflation definitely isn’t coming down. And the long-awaited FOMC meeting is today! Currently, the likelihood of a rate hold is extremely high, but Meldrum thinks the Fed will take Canada’s warning and issue another rate increase. He explains how the Bank of Canada resumed their rate increases after a hold because Canada had the same trend in CPI as the US. He sees Canada’s moves as a “cautionary tale” for US markets, if we can take the hint. But the Fed is trying to avoid a pause-and-restart sequence with rate increases, so Meldrum concludes a rate increase is more than likely. If they do choose not to increase rates, they may phrase it as a “skip” rather than a “pause” to signal to their long-term strategy.
The effective Federal Funds rate (EFFR) sits at 5.08%, well within the target range, but next week it could easily be up another 25 bps. In terms of lags in the economy, we can calculate these by taking the EFFR from the time in question and subtracting it from the current EFFR. Below is a table that reflects the lags measured in 3-month increments:
This effect represents the interest rate increases are still to be felt in our economy. Most people of lower to lower-middle class have probably already felt these effects in their households, but the majority of the economy most likely hasn’t.
This led Meldrum to question “Well how much debt is sensitive to interest rates right now? How much has not been immunized?” To answer this, he refers to the Household Debt Report from the first quarter of 2023 which measures $17 trillion of total household debt. Then it breaks it down into categories, like mortgages. 10% of outstanding mortgages currently contain a floating rate (aka variable rates). This 10% represents 8.52% of the $17 trillion captured in the report. It’s assumed that credit card debt contains floating rates; auto loans most likely contain floating rates; home-equity lines of credit (HELOCs) also contain floating rates. Combined, about 28% of the $17 trillion in outstanding debt is subject to floating rates. This means the remaining 72% must not be subject to floating rates. After his own calculations, Meldrum estimates that this fixed rate debt is immune from at least 354 bps (3.54%) of interest rates hikes.
An effective illustration of this is the example from last week: homeowners who have fixed loans (auto, mortgage, etc.) won’t feel the effects of these rate increases because their debt is fixed—the Fed could continue raising interest rates, but their payments won’t change. But lower-middle class consumers will feel it more immediately as they’re subject to the variable rates of their credit cards, personal loans, etc.
Real Rates, Federal Funds Rate, and TLT
Real yields are budging a little higher on the 5-month, the 7-month, and the 10-month bonds, but by only a small margin.
Federal fund futures (FFF) are slowly flattening out, implying the Market is coming around to no rate hikes.
TLT, the major long-term bond ETF index, is basically flat, down just 7 bps. And the Option-Adjusted Spread (OAS) contracted this week across the board. Not much to see there.
But the attention shifts to equity issuance. As if we didn’t already have enough evidence that the market could care less about a rising interest rate environment, this last month was a record month for Initial Public Offerings (IPOs), secondary offerings, and preferred stock.
Housing
The Primary Mortgage Market Survey shows 30-yr. Fixed Rate Mortgages (FRM) are at 6.71% (down 8 bps from last week) and 15-yr. FRM are at 6.07% (down 11 bps from last week).
- Mortgage applications are down 1.4%
- Refinances down 0.68%
- Purchases are down 1.75%
Homebuilders are up again by a smaller average than last week. Zillow released a May report, showing a month-over-month increase in rents by an average of 1% or more. Additionally, the Housing Price Index showed increases across the board by an average of 1.5% or more. And none of this bodes well for CPI…
SPY (S&P ETF Index)
Meldrum points out the bubble that’s emerged in the last two years as a result of several factors: in 2020, the EFFR was close to zero, so money was cheap; government revenue was being pumped into the economy; student loan payments were put on hold—so in the midst of a pandemic, stocks continued to rise and homebuyers made quick moves on property (remember the bidding wars?). in 2023, the EFFR is 5.08%, so money is no longer cheap to borrow; government issuance is up, so revenue is flowing into the government rather than out of it; student loan payments resume starting in September—there is very little growth happening in the market outside of the AI hype.
And be sure to watch today’s FOMC Meeting—will they raise or skip? Stay tuned!
Investment Advisory Services offered through Newport Wealth Advisors, (NWA) a CA Registered Investment Advisor. Securities offered through Centaurus Financial, Inc., a member FINRA and SIPC, a registered broker/dealer. This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined. Information relating to securities is intended for use by individuals residing in CA. Centaurus Financial Inc., Newport Wealth Advisors Inc., and Standing Oak Advisors are not affiliated companies. The opinions expressed are not intended to be a recommendation or investment advice and does not constitute a solicitation to buy, sell, or hold a security or an investment strategy. The views and opinions are for information and educational purposes only.