On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced that it was keeping rates unchanged. That surprised no one. Then came Fed Chairman Kevin Warsh’s press conference. He wouldn’t talk about the three dissenting opinions on the Committee (they had wanted to raise rates). He said that because interest rates and bond yields in the market were already higher, the market was doing the Fed’s job for it. He refused to give any forward guidance on what the Fed was considering for its next meeting or the rest of the year. Warsh said that the Fed was focused on inflation and would act to keep it under control – at the same time that it didn’t act.
So, what the Fed did was keep rates steady below 4% for the big banks which borrow directly from the Fed, at the same time giving tacit approval to market forces pushing rates higher. That makes a bigger spread and a bigger profit potential for those banks who can borrow at the same rate as before, but loan at a higher level. The people who run banks aren’t stupid. They raised mortgage rates immediately.
And stocks fell because Warsh’s tough talk on inflation was just talk – so far. And oil prices were rising on Middle East tensions (this week we’re back to diplomacy and oil prices have fallen again), and in the middle of earnings season some companies reported underwhelming results.
But on Thursday and Friday markets were higher as investors decided that chipmakers’ stocks were a great idea – again. Bond yields remained elevated. And on Thursday, Microsoft added almost half a trillion dollars to its market capitalization after reporting that its Azure cloud unit revenue surged more than 40% during its fiscal fourth quarter. What’s surprising about all of this is that with companies’ shares higher but bond yields the same, where is the money coming from to go into stocks? Maybe from cash and money market funds.
Last week we reported about OpenAI’s artificial intelligence models going rogue and creating their own internet access and then hacking the company with the answers to their test questions. This week it is Anthropic whose models snuck out of their “sandbox” and hacked other companies. On the one hand, it’s good that we know about these breeches, and on the other hand, OMG. And then comes this quote from Gregory Allen, former director of strategy and policy at the Department of Defense Joint Artificial Intelligence Center: “Anthropic found these hacks because they started looking for them. We actually have no idea how widespread autonomous AI hacking is at this moment.” I am just one hack away from returning to pencil and paper.
As of June, overall prices increased 3.5% for the trailing 12 months. About two-fifths of this increase is attributable to housing. Let me mention again that mortgage rates and house prices usually move in opposition so that buyers can afford their payments. But this has not been a normal housing market since the pandemic, and we continue to see high home prices and high-ish mortgage rates at the same time. All of the baby boomers sitting warm and cozy in their big houses continue to be a drag on the market, but they don’t want to trade a really good mortgage rate for a much higher one.
U.S. Gross Domestic Product (GDP) growth slowed to a 1.5% annualized rate in the second quarter, as the war with Iran took a toll. Economists were expecting 2%.
Shell Oil just confessed to the quiet part out loud, saying that it ran its refineries at 102% of capacity during the second quarter to take advantage of soaring prices.
For the week ending on July 31st, the Standard & Poor’s 500 finished at 7,489, the Nasdaq Composite at 25,373, and the Dow Jones industrial Average at 52,485. The yield on the ten-year Treasury Note closed at 4.745. West Texas Intermediate crude oil cost $79.08 per barrel, while N.Y. gold cost $4,059.55 per ounce, and one Euro was worth $1.15.
Elizabeth E. Cook
Partner, Diastole Wealth Management
News and information presented here were gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Barron’s, Yahoo Finance, CNBC, Sevens Report, Bloomberg, The Wall Street Journal, Axios, Fortune, USAFacts, The Washington Post, HousingWire, CNN, Reuters, and AP. If you have questions, please call Diastole at 203.458.5220, or email me, Liz Cook, at ecook@dwinvest.com. Thank you for reading!
Smoking toad is not as bad as it sounds, or maybe it is. It involves squeezing the glands of Sonoran Desert toads and smoking the dry secretion (5-MeO-DMT) that results. Smokers experience a psychedelic effect which lasts about 30 minutes. It is illegal in the U.S., but allowed in Mexico, which somehow makes me want to go to Mexico even less than I used to. (Full disclosure, I am not a travel buff.)