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 most volatility seems to be on the 1-month and 2-month Treasuries; the 1-month is up 20 basis points (bps) to 5.79% and the 2-month is down 36 bps to 4.87%. This could easily be associated with the looming debt ceiling deadline of June 1.
Corporate earnings are pretty much done and Q1 is in the books for the most part.
Lots of Fed speak this week, which Meldrum believes will influence the market the most.
This week, we have multiple Fed speaking events, but we’ll be following a few select ones:
- Michael Barr’s testimony (available here) and Q&A session (Tue., May 16 & Thu., May 18)
- Jerome Powell’s discussion with Ben Bernanke, former chair of the Fed (Fri., May 19 @ 11A)
Total money market assets increased $18 billion to $5.33 trillion for week ending May 10.
- Retail--$12.25 billion
- Institutional--$6.07 billion
Government funds also increased by $9.35 billion, meaning there are still inflows into these Treasuries despite the volatility on the 1-month and the 2-month, and that creates more competition with equities.
5-year Credit Default Swap (CDS) on US Treasuries changed:
- +1.51% during last week
- +55.8% during last month
- +305.84 during last year
FOMC Minutes
FedWatch probability is still predicting a hold on rate hikes for the June 14 meeting. Even looking ahead to December, the predicted rate ranges are weighting heavier towards the higher rates. Meldrum predicts we’ll see this trend continue as the year goes on. Rates are not coming down; we must listen to what the voting members are saying, and none of them are saying they’re coming down. There would have to be a sustained period of disinflation for this to occur.
Two Fed officials spoke publicly last week and since these are voting members, we should pay close attention to what they say.
Michelle Bowman (Governor)
- “Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time.”
- There’s a clear focus on their dual mandate: inflation remaining high and labor remaining tight.
- Doesn’t sound like someone who thinks a rate cut is coming soon; inflation coming down is not the sole factor in determining whether rates will come down.
- She says “In my view, the most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path…”
Philip Jefferson (nominated for Vice Chair)
- Spoke at the conference entitled “How to Get Back on Track: A Policy Conference”
- Current inflation is still high and there has been little progress on improving core inflation
- Finds it useful to analyze three large categories, represented in Figure 2 below:
- Goods excluding food and energy (red line)
- Housing services (black line)
- Services excluding housing and energy (blue dashed line)
Housing is exceedingly elevated, goods excluding food and energy, and services excluding housing and energy. Jefferson makes the argument that there’s little improvement in the blue dashed line since late 2021.
Core goods inflation has come down since its peak.
Disinflation in core goods prices is occurring at a slower pace than expected.
In assessing what we think monetary policy will be, Meldrum says we must separate the data from our opinions of the data. Most market participants may be going wrong in drawing their own conclusions based on inflation and ignoring what every FOMC voting member is expressing publicly.
We need to shift away from “Here’s what the data says, so this is what the Fed will do” and more towards “What does the FOMC see when they look at the data and what does the FOMC most likely to do regardless of what I think inflation is doing.”
Real Rates
The only scenario where we can expect the Fed to cut rates would be if something substantial breaks in our economy and it would have to be in the credit market.
Corporate bond prices seem to have leveled out.
US Bankruptcy filings per year (as of May 2, 2023) represented in the graph below:
- Top graph reflects 236 US Bankruptcy filings this year; hasn’t been at this amount at this time of year since 2010
- Bottom graph shows a month-by-month tracker of bankruptcy filings.
Mortgage Rates
According to the Primary Mortgage Market Survey, 30-yr. Fixed Rate Mortgages (FRM) are at 6.35% (down just 4 bps from last week) and 15-yr. FRM are at 5.75% (down just 1 bp from last week). This is the definition of stability!
- Mortgage applications are up 6.3%
- Refinances up almost 10%
- Purchases are up 4.76%
CPI & Unemployment
A lot of sideways or lateral movement since July 2022, meaning minimal volatility among certain categories within CPI.
Unemployment shows an increase in initial claims (seasonally adjusted) by 22,000, and an increase in initial claims (not seasonally adjusted) by almost 14,000.
The Consumer Expectations Index tracks expectations that adjust over economic periods since 1990. The graph below points to the last time the debt ceiling was lifted in August 2011:
Meldrum predicts Congress will most likely find a way to resolve their conflicting issues, but it’ll most likely be at the last minute and it won’t be pretty. But if they find a way to push back the X date to February, he imagines the market will be overly optimistic in its response.
Copper & Mining
Copper was in the news last week and Meldrum has been particularly bullish about copper. He profiles the International Copper Study Group (access website here) and a recent headline from the Wall Street Journal:
“Copper Shortage Threatens Green Transition: Challenges in opening new mines expected to leave production lagging behind rising demand”
There has been a big dump in the last few weeks on the cost of copper.
The demand projections for copper for 2031 are 50% more than the same demand in 2021. But the supply forecast is below the demand projection, meaning there’s already a predicted supply shortage in the next 6-8 years of a commodity that’s trading at lower levels right now.
Copper is the easiest bet to make when we consider where global infrastructure is headed.
- Energy transition that’s occurring in wind, solar, electric vehicles, housing, etc.
- Copper is an excellent conductor of electricity and it will play a big role in the future of energy
We can expect two supply crunches ahead:
- Traditional energy isn’t re-gaining its foot-hold
- Mining complex that simply doesn’t have the supply capacity to meet the demand
Meldrum believes copper is the easy pitch over home plate and who doesn’t want that?
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