The stock markets have pulled back slightly from recent record highs, while bond prices have also fallen, pushing yields higher. Why? Inflation has ticked up again.
It’s no surprise, with oil and gas prices rising, that many other costs are rising too. And of course, the dueling blockades of the Strait of Hormuz continue to snarl traffic. Remember the pandemic-era supply-chain issues? They’re back.
The ten-year Treasury Note now pays more than 4.5%. That’s significant because 4.5% is the psychological level at which investors may prefer to buy bonds rather than stock. It’s also the highest level in the past 10 months. The 30-year Treasury is now yielding more than 5% – the highest in almost two decades.
There’s a funny balancing act between bond prices and bond yields. They work in opposite directions, so that if one rises, the other falls. Bond investors are concerned with both the price of bonds and the yield of bonds. These days, with inflation surging, investors are likely to demand higher yields, meaning that the value of fixed-rate bonds will fall. So, investors who already own bonds must decide whether to keep them, thinking that they will hold until maturity (when the bond is redeemed for face value) or sell and buy new bonds, thereby locking in a higher yield. Of course there are floating rate bonds, too, and they make sense in volatile yield markets, but they pay less than market rates because the manager of the bond must make some money too.
The inflation news from last week came from two different reports. First, we received the Consumer Price Index (CPI), which showed that inflation in consumer prices rose by 3.8% over the past year. We can say it together: the Fed’s target inflation rate, at least through Friday, which was Chairman Powell’s last day in charge, was 2%. The next Federal Reserve Open Market Committee meeting, in mid-June, will be helmed by recently confirmed incoming chairman, Kevin Warsh, and we will see then if the targets have moved.
The second inflation report we received was the Producer Price Index (PPI) which tracks prices received by manufacturers for their goods. The annualized wholesale inflation rate rose to 6%. The estimate ahead of time was for 4.9%.
The problem for governments (especially ours) when interest rates rise, is that it gets harder to cover the interest payable on sovereign debt. Also, when times get tough for American consumers, the government may want to step in and spend more to help alleviate the problem, and that is harder to afford when interest rates are rising. According to Fortune magazine, “The U.S. Treasury pays $3 billion a day in interest on national debt [which is] nearing $39 trillion.”
The current administration has proposed a temporary removal of the gas tax, to bring gas prices down for consumers, but the gas tax is only 18.4 cents per gallon – hardly enough to make up for the increased gas prices that consumers are paying now.
Still, American consumers are holding up. Retail sales climbed 0.5% in April from March. That was less than the prior month, but still positive and the third consecutive monthly increase.
When Spirit Airlines went under, its jets were abandoned all over the country. But the airline leasing companies that actually owned them wanted them back. To the rescue were the airplane repo men – pilots who were willing to fly the jets back to the actual owners. Many of the pilots had been working for Spirit until just hours before. It took hours of coordination and voluminous paperwork to prove to the airports that the pilots had the right to fly the planes. Apparently, you can’t just climb the fence as the bad guys chase you and take off in a jet in which you conveniently found the keys.
For the week ending on May 15th, the Standard & Poor’s 500 finished at 7,408, the Dow Jones Industrial Average at 49,526, and the Nasdaq Composite Index at 26,225. The yield on the ten-year Treasury Note closed the week at 4.597%. WTI (American) crude oil cost $101.16 per barrel, while Brent (international) crude cost $109.33 per barrel. N.Y. gold cost $4,564.80 per ounce, and one Euro was worth $1.17.
Elizabeth E. Cook
Partner, Diastole Wealth Management
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Barron’s, The Wall Street Journal, Yahoo Finance, USA Today, Axios, Fortune, Bloomberg, The Bureau of Labor Statistics, CNN, CNBC, The Washington Post, and The Hustle. If you have questions, please call us at 203.458.5220, or email me, Liz Cook, at ecook@dwinvest.com. Thank you for reading.
A 59,000-year-old Neanderthal tooth recently discovered showed signs of dental surgery. And in 1637 France, Cardinal Richelieu grew tired enough of watching his dinner guests pick their teeth with their knives that he ordered all his dinner knives to be rounded off. Thanks to him, we use rounded knives to this day. Except for dental surgery by Neanderthals!