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 & the Fed
Money market interest rates are marginally lower, while capital market rates are rising. And even with the Fed’s recent pause or “skip” in raising interest rates, credit conditions are still tightening and the lags we discussed last week will still be felt. Keep in mind that all the rate hikes are reflected in the bonds—there are no lags when it comes to bond pricing since they’re quickly absorbed into the bond prices.
Money market fund decreased by $4.66 billion to $5.45 trillion for the week: retail was up $3.8 billion, but it was undone by the institutional drop of $8.46 billion—that’s how we end up with a net drop of $4.66 billion.
The next FOMC meeting is July 26 and Powell is on Capitol Hill this week presenting to Congress as part of his semi-annual Monetary Policy Report to Congress. According to FedWatch, the likelihood of another rate increase at the July 26 meeting is at 75%, which should come as no surprise after the recent “skip” in rate increases. The Fed is set to follow-through on their promise that this most recent hold was more of a “skip” than a pause in their trajectory.
An update on lags… some people are suggesting we could even feel lags up to 24 months after the wave of rate increases, but typically 6 to 9 months is how long it takes to feel the effects of rate changes. But no matter how long it takes, the effects will emerge. The table below represents the lags that will be felt at each time interval following the Fed’s rate hikes:
Real Rates, Federal Funds Rate, and TLT
Real yields are barely budging on the 5-year, the 7-year, and the 10-year bonds.
Federal fund futures (FFF) are flattening out. The Market seems to be accepting that it won’t see rate cuts for a while.
TLT, the major long-term bond ETF index, squeezed out a small gain of 65 bps. And the Option-Adjusted Spread (OAS) contracted further this week across the board.
In looking at the overall bond market year-to-date, bonds are doing quite well! Even with rates going up, bond performance has all been positive.
Housing
The Primary Mortgage Market Survey shows 30-yr. Fixed Rate Mortgages (FRM) are at 6.69% (down just 2 bps from last week) and 15-yr. FRM are at 6.10% (up 3 bps from last week).
- Mortgage applications are up 7.2%
- Refinances up 5.96%
- Purchases are up 7.58%
These stats represent a huge rebound from prior weeks. And homebuilders are up again this week. Pay attention to homebuilders next week, which are each expected to report new 52-week highs.
CPI
The news headlines seem to be highlighting “Inflation coming down!” and other sentiments about inflation leveling out. But that attitude is a bit reductionist as it ignores the truth that core inflation has remained at the same levels for the past 12 months. Remember, total inflation measures the price change of all goods and services; core inflation measures the same price change minus food and energy, and core has barely budged in the last year. The energy sector is reporting steep drops over the last year, but they’re in the minority as many other sectors report price increases.
It reminds us of Jerome Powell’s comments at the most recent FOMC Press Conference: “I still see, and my colleagues agree, that risks to inflation are to the upside. You just don’t see any progress on core.”
Generative AI & Transformative Technology
We must be careful when buying into the AI hype. While AI seems to be the new, hot transformative technology, it’s not the first time a new technology debuted to significant popularity. Each new emerging technology faces challenges in the pursuit of 1) fulfilling a particular function 2) for a low (or decreasing) cost. But very often, the cost to produce this technology becomes a barrier to its progress. The early entrants usually bear the cost of producing innovative tech, like Apple bearing the cost of creating and upgrading their original tablet technology. Prior to the release of the iPad, tablet technology didn’t garner consumer attention the way it does today. The same can be said of early adopters of the Internet, cryptocurrency, electric vehicles, etc. In all of these cases, there’s always a sort of plateau effect when it comes to both the popularity of the technology and the cost to produce it. The natural phenomena around emerging and transformative tech reveals itself over time, and prudent investors should be aware of these effects and how they influence the market.
It's also essential to be aware of how some companies are joining in the AI hype for the purpose of bolstering their business—but are all these companies really implementing this much AI technology all at once? Meldrum references a social media post from Best Buy saying, “Let AI make doing laundry easier with an LG washer that’s smarter than ever. It scans your clothes and then suggests the best cycle.” This is not AI technology; this kind of scanning technology is algorithm-based and doesn’t employ any facets of generative AI. But most consumers aren’t doing this level of fact-checking, and so the AI hype continues to work its deceptive magic on consumers, investors, and the market.
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