Market Update: May 8th, 2023
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.
FOMC Meeting (from Wednesday, May 3)
The Fed raised interest rates by 25 basis points (bps) this last week. As of now, it appears they plan to pause the recent pattern of rate hikes in June. In determining the course of future actions, Jerome Powell says the Fed will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” In other words, the Fed is taking a holistic approach to determining their next move.
Employment seems strong and unaffected. Powell included language that the Fed “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” alluding to a possible unexpected event that would constitute altering the Fed’s course of action. This could be another bank failure, or the looming debt ceiling debacle, or many other unexpected economic events.
Press Conference Highlights
- Two goals: 2% target for inflation and price stability
- Economy has slowed significantly
- Housing sector activity is weak
- Business fixed investment is weak
- Labor market is tight, unemployment is low
- Tightening credit conditions
- No one should assume the Fed can protect the economy in the event of default (debt ceiling issue didn’t factor into Wednesday’s decision to raise rates)
Several journalists attempted to get indications from Jerome Powell about future rate hikes, but he assured them these are meeting-to-meeting decisions and it’s inappropriate to estimate where things will be in 6 weeks. Powell referenced seeing inflation fall and rise 2-3 times since March 2022, so ongoing assessment is key to achieving the Fed’s goals. He believes inflation will take some time to come down. When asked about the impact of the US possibly defaulting on its debt, Powell asserted that default must be avoided and made clear that the Fed cannot protect the economy from damages from it.
- The 1-month Treasury, which was up 99 basis points (bps) last week, jumped another 124 bps this week to finish at 5.59%!
- The recent volatility around the 1-month Treasury is hard to explain, especially within the context of the debt ceiling…
- This exceeds the target rate range that the Fed has set.
- Money market funds increased by $47 billion to $5.3 trillion
- Money market funds have always existed as a viable alternative to equities, but the speed of communication is much quicker than it was almost 20 years ago, so people are more aware that this alternative exists. It’s relatively easy for people to move their money out of places where they’re earning little interest (or suffering losses) and into a place where they can squeeze more value out of their money.
April CPI and PPI will be releasing this week. Current predictions from FedWatch for the June 14 meeting lean heavily toward a pause in rate hikes (91.5% likelihood). Looking ahead to the end of the year, predictions about where interest rates will be around December are spread across the board. December predictions are mostly concentrated around a lower range of rates, meaning the Fed is expecting something in the next year to warrant lowering interest rates.
Mortgages and Housing
According to the Primary Mortgage Market Survey, 30-yr. Fixed Rate Mortgages (FRM) are at 6.39% (down just 4 bps from last week) and 15-yr. FRM are at 5.76% (up 5 bps from last week). Over the last few weeks, these minimal fluctuations in rates indicate a leveling out of rates, though they’re both above the Fed’s targeted rate range.
- Homebuilders were mixed with minimal changes in share value.
- Mortgage Applications (month-over-month): down 1.2%
US Mortgage-Backed Securities (MBS) Issuance is down 64% (year-over-year). Mortgage-Backed Securities are bonds that are secured by a bundle of home loans. But with less mortgages available to bundle, the corresponding securities also decrease proportionally. This means that there are less than half of newly issued MBSs than there were in comparison to the same period last year (January – April) last year.
Foreign Currency & Alternatives
US Dollar weakens against:
- Canadian Dollar by 1.25%
- Mexican Peso by 1.27%
- Japanese Yen by 1.07%
While this may sound negative, it bodes well for those of you invested in foreign securities who can benefit from rises in foreign currency. In alternative investments…
- Gold is up 2.53%
- Copper down 5%
- Steel down 13%
Meldrum sees these as indicators that recession is coming. Bitcoin is barely moving, but Meldrum believes the only gain to be earned is through criminal or illegal activity, like money laundering, so he doesn’t recommend it.
Released last Friday, here are some important numbers on US Jobs:
- Labor force shrunk by 43,000
- Participation rate held steady at 62.6%
- Employed workers increased by 139,000
- Unemployed workers decreased by 182,000
- Unemployment rate at 3.4%
The unemployment rate is broken down by educational level:
- Less than High School – down 167,000 (Unemployment rate: 5.4%)
- High School Diploma – up 99,000 (Unemployment rate: 3.9%)
- Some college – down 227,000 (Unemployment rate: 2.9%)
- Bachelor’s Degree and above – up 185,000 (Unemployment rate: 1.9%)
So if anyone is still arguing about the value of a college education, here it is! Even in this economic climate, more education not only earns you higher wages, but it also increases the chances you’ll find a job. As one’s educational level increases, the corresponding unemployment rate you can expect decreases.
Meldrum issues a warning that during weeks like this, when little data is being reported, there’s an overwhelming consumer sentiment to “not miss out” and get into the market in some way. He says this can be risky depending on what narrative or attitude rules the day. He thinks unfounded optimism can be just as dangerous as deep skepticism. For example, if CPI reports that inflation is lighter than expected or even unchanged, it will only fuel the narrative that things are going well and this could further inflate certain areas of the market. Keep this in mind as the week progresses and stay tuned for more updates!
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