Tag: Fed Goernemnt

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Market In a Snap! August 4th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
    
S&P 5004,478-2.27%16.63%
Nasdaq Composite13,909-2.85%32.89%
Russell 2,0001,957-1.14%11.38%
Crude Oil82.632.70%2.88%
US Treasury 10yr Yield3.79%  

Source: YCharts, Yahoo! Finance, WSJ

Does the US Treasury Debt Downgrade Really Matter?

On August 1st, Fitch Ratings, one of the three private credit rating firms, downgraded its U.S. credit rating from AAA to AA+.  In doing so, it joined Standard & Poor’s, which downgraded its U.S. credit rating to AA+ in August of 2011.  Moody’s remains alone in maintaining its AAA rating. Fitch described the drivers of its decision as: rising debt-to-gdp, higher interest rates increasing the cost to service the debt as bonds rollover, rising medicare & social security spending, and “erosion of governance”.  

Those asking what this means for the stock and bond market have pointed to the 2011 S&P downgrade and the ~15% fall in S&P 500 value over the subsequent two months.  In theory, a lower sovereign credit rating should increase the interest rate that the US treasury needs to offer investors to lend them money.  Since corporate bonds typically add a risk premium on top of US treasury yields, a downgrade should theoretically also increase corporate borrowing costs and slow economic growth.  In practice, however, that is not always the case.  US borrowing costs fell after the 2011 downgrade and remained low for the subsequent 10+ years – only meaningfully rising above those levels in mid-2022.  Similarly, Japan, which is rated ‘A’ and is in worse financial shape than the US has the lowest interest rates in the world.  Fitch had warned of the potential rating downgrade during the debt ceiling debate earlier this year and the issues that it pointed out are well known by the bond market.   

While the downgrade may have little near-term impact, it should stand as a warning to policy makers and the market that ongoing deficit spending and political brinksmanship will potentially come at a cost.  That cost may be the erosion of the “exorbitant privilege” that the US enjoys as the world’s reserve currency.  Global trade conducted in U.S. dollars has allowed capital to consistently flow into US capital markets and kept borrowing costs for the US government and corporations low.  Waning confidence in the fiscal responsibility of the US government may eventually erode this privilege.      

 
What We’re Reading:

yahoo!finance: Warren Buffett is Buying Treasuries Regardless of US Downgrade by Fitch

CNN: Gasoline prices are spiking.  That’s a problem for Powell and the FedWSJ: Earnings Season Threatens Lofty Stocks

Chart of the Week:

                Source: Congressional Budget Office: The Budget and Economic Outlook: 2023 to 2033  

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Market In a Snap! July 28th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
    
S&P 5004,5821.01%19.34%
Nasdaq Composite14,3162.02%36.79%
Russell 2,0001,9811.02%12.66%
Crude Oil80.365.02%0.41%
US Treasury 10yr Yield3.79%  

Source: YCharts, Yahoo! Finance, WSJ

Recap of Presidio Capital Management Webinar We had hoped to share a replay of the webinar that we hosted this week with special guest, John Tousley, CFA, Managing Director – Goldman Sachs.  However, due to an unnamed staff member selecting ‘pause recording’ instead of ‘record’ (don’t worry, Dustin, I won’t tell anyone it was you), we do not have a recording to share with those of you who were unable to attend.  So, instead, below are a few highlights from the conversation:  

  • Dustin hosted John Tousley for this conversation.  John is the Global Head of Market Strategy for Goldman Sachs Asset Management.  He is regularly featured on financial news television and consults with institutional investors on delivering successful long-term outcomes.
  • Dustin laid out the case for investor caution, including Fed rate hikes and ‘higher for longer’ rates in the face of persistent inflation causing problems for consumers & corporations (credit card/auto loan delinquencies, rising borrowing costs, lower corporate profit margins and reduced hiring).  Dustin made the point that the current AI/tech rebound may be too optimistic in light of the economic backdrop.
  • John presented the case for optimism.  He highlighted potential for the Fed to stop hiking rates, improving economic activity indicators, and an AI-driven productivity boom.  Despite his view of a “soft” landing, John expressed a Flat & Fat thesis, where equity gains are constrained by higher interest rates. 
  • Dustin and John took a deep dive into the investment landscape and highlighted opportunities for investors in each asset class.
    • Cash: While a tactically useful asset class to take advantage of a potential pullback, cash yields will likely fall with interest rates.
    • Fixed Income: Despite 2022’s challenges, fixed income is an important part of a diversified portfolio.  In today’s environment, it offers yield and the potential to be a ballast to the more volatile equity positions.  Investors should be selective, however, of the credit risk within their fixed income positions.
    • Stocks: While Tech/AI has been the story thus far in 2023, there is opportunity for a “catch-up” in cyclical areas of the market, including small/mid cap and non-US markets.
    • Real Assets: In a period of global economic recovery and sustained higher levels of inflation, certain commodities look attractive.
  • Overall, both Dustin and John stressed the importance for investors to build an investment plan that is designed specifically around their unique risk and return requirements.  In a market environment of high interest rates and a fully-valued stock market, investors should be prepared to stick to their plan throughout the inevitable ups and downs of the market cycle.

 
What We’re Reading:

WSJ: US economy grows at slowest pace in 5 months.  Inflation ‘sticky,’ S&P says

Morningstar: Fed’s Powell Talks Tough After Rate Hike, But a Pause Seen Likely From Here

Chart of the Week:

A chart from Bank of America featuring the AAII investor survey data shows a significant divide between stock positioning of retail investors (dark blue) and professional investors (light blue).  This gap will likely close – either by professional money managers chasing returns, or volatility causing retail investors to reduce their fully-loaded equity allocations.

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Market In a Snap! May 15th-May 19th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
    
S&P 5004,193.201.64%9.18%
Nasdaq Composite12,664.303.04%20.94%
Russell 2,0001,773.721.91%0.95%
Crude Oil71.772.72%-10.58%
US Treasury 10yr Yield3.69%  

Source: YCharts, Yahoo! Finance, WSJ

Market Recap: Is the Tech Trade Back?

After leading the markets to the downside last year, US large-cap stocks have been the best performer year-to-date.  The equal-weighted S&P 500 index is +1.14% for the year vs. a +9.44% rally for the market-cap weighted S&P 500 index.  On a single stock basis, Nividia and Meta (formerly Facebook) have more than doubled in value over the course of the year.  Two main factors are responsible for the rally in tech shares:

  1. The AI Boom: investors have been enamored with companies that may be exposed to the wave on Artificial Intelligence (AI) applications.  An analysis by Societe Generale finds that removing the 20 stocks most widely owned by AI-focused funds would reduce the S&P 500 performance by roughly 10% year-to-date).
  • Expectations of an Upcoming Fed Pivot:  Despite efforts from Chairman Powell and other Fed presidents to convince the markets that the Fed may indeed continue to hike rates if inflation does not return to the 2% level, the market expects central bankers will soon be cutting rates.  Current market pricing reflects the assumption that the Fed will cut short-term borrowing costs by 0.5% by year-end.  This shift to (more) accommodative monetary policy will likely benefit the interest-rate sensitive technology sector.

Investors may be well served to closely examine their risk tolerance and time horizon before chasing after returns in tech stocks, however. We highlight a few factors which could derail the rally:

  1. Stagflation: slowing growth (whether an official recession or not) combined with persistently sticky inflation will both challenge earnings for tech stocks and valuations.  The Fed may be disinclined to acquiesce to the market’s desire for lower rates and the lofty valuations supporting the tech rally may be forced to moderate.
  2. Valuations: investors must not only consider the quality of the companies that they own, but also the price they pay to own those companies.  U.S. “Mega-Cap” stocks (the eight stocks that currently represent almost 25% of the market cap of the S&P 500) are trading at near-record valuations relative to the remaining 492 stocks in the index.

As always, we encourage investors to maintain portfolios that cater to their unique investment time horizon and risk profile.  In the long-term, a disciplined process which focuses on risk management and diversification leads to superior results.

What We’re Reading:

Professor Jeremy Siegel: Summarizing, I Remain Cautious On the Markets

Natixis: Why Everyone’s Talking About…Stagflation

Reuters: Artificial intelligence gives real boost to U.S. stock market

BofA Strategist Says Sell US Stocks as AI Seen Forming a Bubble

FT: Stonks: Thank you AI hype

Chart of the Week:

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Market In a Snap! May 1st – May 5th, 2023

By: Dave Chenet, CFA, CAIA

 CloseWeekly returnYTD return
    
S&P 5004,136.25-0.80%7.73%
Nasdaq Composite12,235.410.07%16.90%
Russell 2,0001,759.88-0.43%0.05%
Crude Oil71.21-6.11%-11.1%
US Treasury 10yr Yield3.45%  
Source: YCharts, Yahoo! Finance, WSJ

Market Recap

A very volatile week in markets saw the major indices rally on Friday to finish the week only modestly lower.  The week was highlighted by the Federal Reserve decision announcement on Wednesday to hike the federal funds rates by 0.25% to 5.0-5.25%.  While the rate increase was largely anticipated, remarks by Fed Chair Powell skewed more hawkish than the market had hoped.  Powell signaled to the market that the Fed intends to remain “data dependent” and will keep the flexibility to continue to hike rates should inflation remain high. 

As depicted in this week’s Chart of the Week, the market has a very different expectation than the Fed.  The current futures pricing reflects a 99.9% probability that the Fed will cut rates at least once by the end of the year and a 97% chance that the Fed will cut by at least two 0.25% decreases.  The median expectation is for the Fed to cut by 0.75% by year-end.  Consistent with market prognostications are economist forecasts; the Atlanta Fed GDP Now forecasting tool estimates that the economy will grow at a 2.7% pace in Q2, vs economist expectations of no growth.

Market rate-cut expectations and economists’ call for stalling growth paint a stark picture for near-term risk assets.  The Federal Reserve has acknowledged that its actions impact the economy through “long and variable lags.” The ongoing bank turmoil and credit crunch may be early indications of building stress in the financial system, however, the Fed has drawn its line in the sand and is messaging that, while a pause may be justified, it has yet to see the case for rate cuts.  Moreover, and under-reported in the financial press, the Fed has been unflinching in its ongoing balance sheet reduction.  History tells us that “Mr. Market” is usually more prescient than the Fed, but, in our view risks to near-term asset prices are mounting.  Investors will be well-served by employing a disciplined approach that is structured around their unique investment time horizon and financial plan. 

What We’re Reading:

Non-Farm Payroll Data Surprises with Strong Performance

WSJ: The Covid-19 Crisis is Officially Over.  Everything changed.

Coucil of Economic Advisers: The Potential Economic Impacts of Various Debt Ceiling Scenarios

Chart of the Week:

Source: CME Group

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Market in a Snap! January 23rd – January 27th, 2023

By: Dave Chenet, CFA, CAIA®

 CloseWeekly returnYTD return
    
S&P 5004,070.562.47%6.02%
Nasdaq Composite11,621.714.32%11.04%
Russell 2,0001,903.060.65%8.05%
Crude Oil79.39-2.22%-1.00%
US Treasury 10yr Yield3.49%  

Source: YCharts, Yahoo! finance

Market Recap

US Markets rallied this week with all three major indices posting gains on the back of a better-than-expected Q4 ’22 GDP report and corporate earnings.  On the economic data front, the initial estimate of 2022 Q4 growth was 2.9%, beating estimates and the PCE price index reported a 5% gain from December ’21 – slightly below expectations and the lowest reading since September 2021.  Notable earnings beats on the week included Tesla and American Express.  Intel and Chevron missed their respective estimates.

Looking forward, all eyes will be on the Federal Reserve’s meeting next week.  It is widely expected that it will announce an increase in the Federal Funds rate of 0.25% to 4.5%-4.75%.  The market is currently pricing just a 1.9% chance that the Federal Reserve will increase by 0.5% and a 0% likelihood that the Fed won’t hike at all.  This is down from a 40% likelihood of a 0.50% hike at the start of the year, reflecting the broadly lower inflation readings that have been reported in January. 

Looking more broadly, the yield on the U.S. 10-year bond peaked on October 24th at 4.25% and has retreated to 3.5%.  This decrease in yields has boosted the price of both bonds and stocks with cyclical assets, such as Emerging Market stocks, European Stocks and US Small-Cap/Mid-Cap and Value outperforming the broad market.  Markets will pay close attention to the Federal Reserve next week for their cue on whether this rally can continue with a more acquiescent Fed, or if Jerome Powell & co will maintain the position that rates will remain high for some time.

What We’re Reading:

EY: US GDP (Q4): Economy caps 2022 on a strong note, but enters 2023 with doubts

FT: Why passive investing makes less sense in the current environment – Mohamed El-Erian

NPR: Justin Bieber sells the rights to his entire catalog for over $200 million.

Chart of the Week:

A strong January (5%+ return) after a negative year has historically been positive for full-year S&P 500 performance, with the market positive in each of the last five instances and an average return of almost 30% for the year.

Advisory services are offered through Presidio Capital Management LLC, Registered Investment Advisers.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Presidio Capital Management, LLC unless a client service agreement is in place.

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Market In A Snap! March 7th-March 11th, 2022

By: Jeff Anderson, CFA

CloseWeekly returnYTD return
S&P 5004,204.31-2.88%-11.79%
Nasdaq Composite12,843.81-3.53%  -17.90% 
Russell 2,000 1,979.67-1.06%-15.86%
US Treasury 10yr Yield1.998 %.26%

Source: Wall St. Journal

“Beware The Ides of March”

Inflation, Taxes, and Market Crashes.  Those are the three “big” things affecting retirement savings.  It’s the cornerstone of our philosophy.  This month, unfortunately, has experienced all three.  Many of us are preparing to file taxes next month.  Inflationary pressures have increased with the Russian-Ukraine conflict, and to top it off we’re amid an equity market correction brought on by geopolitical events changing monetary policy and inflation which, unfortunately, looks like it will stay higher longer.  It is times like these that can really test our faith.  Will oil prices tip us into recession?  Are we headed towards a 1970’s style stagflation?  Will things ever get back to “normal”? Are these the questions we thought of on our own or are they the rumblings of the financial news media looking to grab our attention?  Well, they have our attention.  Fortunately for us, we have history on our side.  There aren’t many (if any) decades over the past 120 years that didn’t involve volatile markets, wars, or inflation/deflation/stagflation.  

What is stagflation?  Stagflation is characterized by slow economic growth and high unemployment accompanied by risking prices (i.e., higher inflation).  We certainly aren’t in a stagflation environment now.  Unemployment is low and growth is still strong (but slowing in some areas).  Things can obviously change, and with oil prices marching higher and higher and $6 per gallon prices at the pump, the pressure on our wallets is tighter.  Airlines are increasing ticket prices to help with rising fuel prices which may temper people’s appetite for planning vacations. Food costs will likely remain elevated given the cost of transportation.  The economy moves in a cycle, and it always has, and until someone invents a better economic model for society, it will continue to do so.  But, as of today, the odds of a ‘70 style stagflation are low. Like sports betting, odds can change.

We will always have something to worry about, but putting things in context, having a plan, and most importantly being able to reduce the noise will be the best antidote.

Breaking Down Inflation:

We may be at risk of beating the dead horse of  “inflation, inflation, inflation”.  Can we stop talking about it?  Hopefully, we will be able to look at it in the rearview mirror like we have with COVID-19.  For the time being, we’ll write about it when we think there’s something noteworthy. 

The Wall Street Journal put out a good piece on where the 7.5% rise in consumer prices in 2021 came from.  Which is the rate at the end of February which clocked in at 7.9%.  Prices are likely to remain elevated for at least the first half of 2022.  If the Ukrainian conflict continues into the summer, prices may go even higher. 

See the chart below highlighting all the components of inflation.  

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Market In A Snap! December 20th-December 24th, 2021

By: Jeff Anderson, CFA

This Week: Markets finished ahead during this shortened holiday week. As you know, markets are closed today for Christmas. The market digested last week’s Federal Reserve Chairman Powell’s comments and resumed their upward trajectory for the year. Bond yields remain benign keeping a lid on mortgage rates. Housing starts have slowed but, overall, residential real estate construction demand is strong. Inventory is still relatively low, pushing prices higher. With all the stock market news focused on technology companies, you might be surprised to note that the best performing companies in December have been from defensive sectors, such as Utilities, Consumer Staples, and Healthcare. Year-To-Date, the best performing sectors have been Energy (up 66.6%), Home Construction (up over 50%), Semiconductors (up ~42%) and Financials (up over 33%).

Crude Oil finished up 2.6% through Thursday, closing at $73.83 per barrel. Happy Holidays!

 CloseWeekly returnYTD return
    
S&P 5004,725.721.22%25.82%
Nasdaq15,653.373.12%21.45%
Russell 2,0002,243.714.24%13.61%
US Treasury 10yr Yield1.495%  

Source: Wall St. Journal

This Issue:

  • Market Update
  • Consumer Spending Cooled off in November
  • Bloomberg: New Study Shows Omicron Has 80% Lower Risk of Hospitalization
  • Build-Back-Better Act Derailed Again

Consumer Spending Cooled off in November:

The Wall Street Journal reported personal spending rose 0.6% in November compared with 1.4% in October. Many consumers purchased holiday gifts earlier this year because of fears of shortages. Overall, the consumer is still in good shape, with unemployment around 4.2% and personal savings of over $2.5 trillion.  However, the labor participation rate is still lower than in the past (see chart) and the personal savings rate, albeit still relatively high, is back to around pre-pandemic levels. As we have written in previous updates, economists were unsure how much demand was pulled forward because of certain product shortages on top spending down of the stimulus checks in 2020 and early 2021.

Bloomberg: New Study Shows Omicron Has 80% Lower Risk of Hospitalization:

The Omicron variant spreads much faster than the previous variants. However, these infections are 80% less likely to be hospitalized if they catch it. Unfortunately, if admitted to the hospital, the risk of severe disease is like the previous two. As many of us are somewhat numb or tired of hearing about Covid-19, the risks of illness for many still exist. The US reported nearly 240,000 new cases yesterday. Dr. Fauci said earlier in the week that the peak wave for Omicron would come much faster and the risk of infections are much higher for the unvaccinated. There have been many vaccinated people contracting Omicron, but the symptoms have been much milder on balance.

Build-Back-Better Act Derailed Again:

West Virginia Democratic Senator Joe Manchin has put a wrench in the legislation, citing concerns over the spending bill’s effects on inflation and debt levels. Senator Manchin has rejected certain provisions like extended paid leave plan, and a program aimed at pushing utilities to use more clean energy. President Biden has publicly stated that a deal will get done.  The bill has already come down from $3.5 trillion to around $2 trillion. Senator Manchin has publicly stated that he would only support up to $1.5 trillion in spending.  With the Fed accelerating bond purchases and signaling rate increases in 2022, this fiscal stimulus could be even more important for the economy in 2021.

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Market In A Snap! October 18th-October 22nd,2021

By Jeff Anderseron, CFA

This Week: The S&P 500 closed the week at 4,544.90, and the Dow climbed to all-time highs.  The S&P 500 is up 1.64% this week and 21% year-to-date.  The US 10 Yr Treasury Bond yield drifted higher, settling in at 1.64%.  Crude Oil continued its strength, closing at $84.18 per barrel, notching gains of nearly 2% on the week and gaining 74% year-to-date reminding us that near-term inflation is real.

This Issue:

  • Market Update
  • Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating Inflation Risk
  • The Chips That Make The World Go Round
  • There’s Money in The Banana Stand

Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating More Inflation Risk:

On Friday, Fed Governor Jay Powell stated that the “Supply-side constraints have gotten worse”.  The Fed had previously predicted that much of these constraints to have lessened by year-end.  Mr. Powell went on to add that the central bank will “need to make sure that our policy is positioned to stay flexible in the months ahead”.  We are witnessing the negative effects of shutting down a global economy.  Is the Fed moving away from its “inflation-is-transitory” stance?  Despite these constraints, the breakeven inflation rate going out 5 years is around 2.75% vs 2.5% for the 10-year rate, both well below the current inflation run rate.  Bond yields remain low and the velocity of money (which is a key gauge of inflation – higher velocity implies higher inflation) is yet to move higher, implying that long-term inflation is still not a foregone conclusion.  Looking at the chart from the St Louis Federal Reserve, despite the amount of liquidity provided by the Fed, velocity remains anemic.  Money has not flowed out into the real economy to support the belief that inflation is purely a monetary phenomenon.  Arguments can be made about the trajectory of inflation, but what we can be certain of is that money in the future will be worth less than it is worth today.

The Chips that make the world Go Round:

Taiwan has 63% market share of the global semiconductor industry.  Semiconductors are the new oil of the 21st century, a vital component in almost every product.  Martijn Rasser, a senior fellow at the Center for a New American Security was quoted saying, “Whoever controls the design and production of these microchips, they will set the course for the 21st century.”  Approximately 90% of the semiconductors used by US technology companies rely on Taiwanese manufacturing.   This concentration is likely to issue #1 when it comes to American and Chinese relations.

There’s Money in the Banana Stand:

There is no argument that the Pandemic has widened the wealth gap.  The stimulus provided by Governments around the world was necessary for many, and a boon for others.  American and European households are sitting on record amounts of savings.  Some of it will be used as security for future uncertainties, but much of it is just waiting to be spent.  This cash hoard is likely one reason by supply constraints is an issue as there is a lot of deferred consumption.

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Market In A Snap! September 28th-October 1st, 2021

By Jeff Anderson, CFA

US equities were lower in September, with the S&P 500 logging its first decline since January and its worst month since September 2020.  The S&P 500 declined 4.76% for the month.  The yield on the US Treasury 10-year note climbed 19.8% to 1.487% and is back to where it was just prior to the onset of the Global pandemic in early 2020.  Oil rallied 7.65% for the month to close at $75.12 per barrel. Bonds can perform well in a rising interest rate, low growth environment if the bond portfolio is laddered – portfolios of bonds with a fixed duration target.  Most bond mutual funds and ETFs construct their portfolios to maintain a fairly constant average duration which is accomplished by constantly reinvesting in longer-dated bonds from the proceeds of matured bonds.  The higher yields of those newly purchased bonds eventually will make up for the capital losses incurred by previously owned bonds.

Employment Data Delayed (no need to be alarmed)

The US monthly employment report typically comes out the first Friday of the month.  For October, it won’t be released until the 8th (next Friday).  Consensus for non-farm payrolls is looking for growth of 513,000 in September, while the unemployment rate will drop to 5.0% from 5.2%.  First Trust’s economists believe that the consensus may be overlooking the fact that the national system of overly generous unemployment benefits due to COVID-19 ran out on Labor Day weekend.  “Many unemployed who had previously been getting payments in excess of what they could have earned while working are no longer able to do so”.   Couple that with kids going back to in-school learning, the motivation for people to get back to work are the strongest in months.  With employers struggling to hire employees and/or pay more in wages, this may come as a nice surprise.

Prices to The Moon

Much of the increase in rents is attributable to the pandemic and the rental vacancy spike and eviction moratorium enacted by the federal government.  Regardless, the Dallas Federal Reserve predicts that the official rent index from the Bureau of Labor Statistics will increase 6.9% by year-end 20-23, which would be the highest in more than 30 years.  Despite the ongoing debate surrounding an increase in inflation being permanent or transitory, certain sectors of the economy continue to eat into the wallets of the US household.

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Market In A Snap! September 20th – September 24th, 2021

By Jeff Anderson, CFA

FedEx Delivers an Inflation Message

FedEx reported earnings this week that disappointed analysts, sending shares down over 10% for the week.  The earnings miss was attributable to a higher cost of labor and overall labor shortages. Packages were re-routed to distribution hubs that had sufficient labor availability.  The company stated, “The current labor environment is driving inefficiencies in the operation of our network and significantly impacting our financial results”.  FedEx’s President and COO also announced that shipping rates will increase 6 to 8% in January 2022 in addition to a fuel surcharge increase starting November 1, 2021.

The FOMC met this week

Fed Governor Jay Powell held his quarterly press conference Wednesday, where he delivered the Fed’s message re: the state of the economy, inflation expectations, interest rates and tapering.  The economy is continuing to grow and is still coping with the effects of the global pandemic economic shutdown in 2020.  Even though inflation expectations have been raised multiple times by the FOMC (now at 2.2%), the current pace of inflation is running much higher (see chart), yet the Fed is standing firm on their belief that it is still transitory.  Mr. Powell stated that the Fed will begin tapering their bond purchases later in the year by $10 billion per month. At the current pace of $120 billion per month, tapering should be completed within 12 months, at which time we can expect the Fed to begin raising interest rates.  Interestingly, the 5-year US inflation breakeven expectation is still below 2.5%, slightly above the FOMC’s upper range but well below the current run rate.  The UST 10-year note bumped up is a week from 1.3% to roughly 1.4%, still firmly in the negative real yield zone.

August Housing Starts increased 3.9% to a 1.615 million annual rate.

The gain was entirely due to multi-family starts.  Single-family starts declined 2.8% for the month.  First Trust’s senior economist wrote this week that, “While it’s too early to know for sure, there are signs developers may be shifting resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents as some people move back into big cities and the eviction moratorium ends”.  First Trust’s Brian Wesbury went on to say “While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to remain in an upward trend.  A big reason for our confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started.  In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999” (emphasis added).

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.*******

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