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:
Total money market assets increased $18 billion to $5.33 trillion for week ending May 10.
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:
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)
Philip Jefferson (nominated for Vice Chair)
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:
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!
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.
We can expect two supply crunches ahead:
Meldrum believes copper is the easy pitch over home plate and who doesn’t want that?
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