[Market Outlook] Higher For Longer

The Pain That Rising Rates Is Causing [Company Logo] Higher For Longer. The Pain That Rising Rates Is Causing. By Donn Goodman and Keith Schneider [image] Happy late summer Gaugers. We all hope you continue to take advantage of the warmer weather and are enjoying late summer’s lazy dog days. Interest rates pushed higher yet again this past week. This trend has caught the attention of positive sentiment and stock-happy Wall Street. A move higher in Treasuries has pushed 10-year yields close to their highest point since 2007 and spurred what is now the biggest break in an $8 trillion equity rally since last October (2022). See charts below of the 10-year and 30-year bond yields towards the end of the week. [image] [image] There are a number of catalysts for this rise in rates, including: - A larger than expected Treasury supply meeting with a lukewarm appetite for these securities. The Federal Reserve is not buying (they are selling which is exacerbating the supply). China does not seem to want them. Other countries have begun converting to using their local currencies for oil purchases (such as the Yaun or Renminbi) do not want to put their local money into US Dollars or Treasuries. So rates are rising to spur more demand. - The recent Fitch and Moody’s downgrades may be viewed as “irrelevant”. However, the criticism conveyed to the rest of the world is a real concern for US debt and deficits. This had the effect of downgrading credit quality, which is most often met with higher rates as compensation for the additional risk, if any, that will be taken. - A still hawkish Federal Reserve that continues to see strong growth in the US economy. This week they talked about the possibility of more rate hikes. On Wednesday, the Federal Reserve minutes were released. The immediate response was rising rate expectations. Here is a summary of those minutes: - Most officials still see the need for higher rates - Although some officials do worry about over-tightening - The Fed sees tighter bank credit conditions. - The Fees sees no recession in 2023. - The commercial real estate value decline is hurting some banks. - A US economy that has yet to show the necessary strain of more than 5 percentage points of rate hikes. A continued series of solid data points have pushed Citigroup Inc’s US economic surprise index to close to its highest level in nearly two and half years. - GDP expectations which have been adjusted upward several times in the past year. GDP for the 2nd quarter came in much higher than expected (2.4% vs 1.8%) and the upcoming quarter estimates have been adjusted upward. Growth is on solid footing. - The Atlanta Fed GDPNow tool is now forecasting Q3 2023 GDP growth at a massive 5.8%. This is more than double the 2.5% expected by JP Morgan. It is almost triple the 2.1% expected by Blue Chip Consensus. Does the bond market know something about upcoming dramatic growth in the US that the average economist doesn’t? See chart below: [image] - This economic resilience and the expectation that it will likely continue, has helped explain why both the 10-year and 30-year bond yields continue to climb. (see first two charts at the top of the article) The Fed has doubled down on its view that a recession is no longer likely. This has caught the attention of the bond market as it now struggles with the GROWTH story. However, they do acknowledge that we are in a commercial real estate crisis. If the FED can avoid a recession after the dramatic and unprecedented historical tightening they have instituted during 2022 and 2023, that would be IMPRESSIVE! It is interesting to look at the longer-term picture (24 years) to see that the dominant bond market trend has been broken. See chart below: [image] MarketGauge’s own Mish Schneider works closely with a brilliant analyst, David Keller (Chartered Market Technician) at Stock Charts. Just this week he provided his own technical analysis of bonds. His view (shown below) is that the 10-year yield is showing signs that it can drift higher, perhaps hitting 5%. This might be what the Fed needs to have happen to finally slow down the economy. See chart below: [image] There have been numerous areas of the economy that have seen unparalleled damage (pain) from these rising rates. Here are a few: Mortgages, and Home Buying: - This week the average interest rate on a 30-year mortgage rose to its highest level since 2003, at 7.4% - 2 years ago, buying a $500,000 home with 20% down meant you paid $207,000 in interest on a 30-year mortgage. Now buying the same home means you pay $600,000 in interest on a 30-year mortgage. - In many states mortgage rates are already over 8%. See graph below: [image] - In 2020 you could afford a $758,000 house with a 20% down payment on a $2,500 month 30-year mortgage. Now you can afford a $443,000 house with 20% down on a $2,500 a month 30-year mortgage. See chart below: [image] - Housing affordability just hit a new low. See chart below: [image] Renting a Home: - Renting a house has become even more expensive. The average “asking” rent for a house in the US rose again in July to $2,038 a month. - Less than 3 years ago, the average asking rent in the US was at $1,600 - The median payment on a mortgage just hit a record $2,800 a month in the US. - Simply living in the US has never been more expensive. See the asking price for rent in the chart below: [image] Inflation - Rising interest rates continue to have a profound impact on everything from energy to food prices to mortgages and rising rents (including Apartment rents). - While overall inflation is now at 3.2% simply having a house to live in (as shown above) is incredibly expensive. - Inflation on shelter is still at an alarming 7.7% - Meanwhile, looking to enjoy a meal at a restaurant? Inflation is still at 7.1% for food away from home. Inflation has made simple things, that we may have taken for granted, a luxury. Debt - Total mortgage debt is $12 trillion, now more than double the 2006 peak. - Record $1.6 trillion in auto loans - Record $1. Trillion in credit card debt. - Record $1.6 trillion in student loans. - 36% of Americans have more credit card debt than savings while student loan payments are set to resume this fall for the first time since 2020. - There is a record 17.1 trillion in household debt. The amount of debt is alarming and rising interest rates have exacerbated the pain of repaying back credit as the interest rates on credit cards have ballooned to the high teens to 25%. See chart below of delinquency of debt: [image] Rising interest rates help support the US Dollar. As is typical when interest rates rise and higher yielding instruments (US Treasuries) attract more worldwide buyers, the US Dollar tends to gain strength. This is more often a negative for multi-national companies as their revenue from global sales can be hampered (a weaker US Dollar is often better for selling goods overseas). As we witnessed throughout 2022, a stronger dollar was not beneficial for stocks. If you have been a long-time reader of this weekly Market Outlook, you know that we have illustrated on numerous occasions the negative effect a strong US Dollar has had on US stocks. Therefore, it is not surprising to see additional volatility and a pullback in US stocks during August with lower volume, interest rates that are trending up, and higher volatility. See US Dollar chart below: [image] It is also not surprising then, to see a stronger money inflow to bonds/fixed income ETFs then stock ETFs. See chart below: [image] If you look closely at the chart above, you will also notice large inflows to stock ETFs (black bar) during a few of the best performing stock market months over the past year (Oct, Nov & December 2022, and May, June, and July 2023). The bond market: the great disruptor. Use the links below to continue reading about the bond market’s impact on stocks, seasonality, the Big View bullets and Keith’s weekly video analysis. 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