You are forgiven if you are not as excited as I am about the upcoming producer price index report (PPI) for August, which will be released on Thursday, and the consumer price index report (CPI), also for August, which will arrive on Friday. These are the last data points that the Federal Reserve Open Market Committee (FOMC) will have before it makes its next interest rate decision on Wednesday the 16th.
We know that the current presidential administration wants interest rates cut, but the data is leaning toward a rate hike. Inflation is still well above the Fed’s 2% target and is not falling on its own. A rate hike would make it less attractive to get credit and thus would tighten economic conditions. But the Fed has a dual mandate: keeping prices low and keeping employment high. So where do we stand on employment? Thank you for asking! The August jobs report was released on Friday 9/4 and stunned with its strong numbers. 162,000 net new jobs were created versus 53,000 expected. And the unemployment rate was steady at 4.1%.
If the job market were weak, the FOMC might sit tight on rates, not wanting to hurt job creation, but the job market is strong, so it doesn’t stand in the way of a rate hike to fight inflation. Current odds of a rate hike next week stand at 52%-60%.
And speaking of inflation, a Brown University study has determined that U.S. consumers have now paid $100 billion in higher energy prices since the beginning of the war with Iran. That reflects higher gas costs, but also home heating fuel and diesel (which raises prices on food and other goods that are transported on trucks). This figure does not include the cost of the war itself, just the extra costs of energy over where they were when the war began. And FYI, U.S. crude oil now costs more than $90 per barrel.
The bond market was one of the biggest influences on stock markets last week. As the U.S. faces a ballooning debt, investors find that Treasury debt is less attractive. In the old days, Treasurys enjoyed a special consideration as one of the safest investments in the world. But now they have been downgraded, and investors expect to receive a competitive yield in exchange for loaning money to the U.S. With the general assumption that interest rates will have to rise to control inflation, and will rise on their own to reflect inflation, investors are selling bonds, causing prices to fall and yields to rise. If you hold onto a fixed-rate bond while rates are rising, your bond will lose principal IN THE SHORT TERM (i.e. if you sell it early). If you hold it to maturity you will receive the face value or par value you originally purchased.
Back to stocks. What do you think happens to stocks when bonds yields are rising? Stock owners consider selling stocks to buy bonds. For many investors, a 5% yield (such as you can get currently on a 30-year Treasury), in a safe investment, beats the odds that you will be first to find the next Nvidia. And this trend is happening around the world. We are not the only profligate spenders.
What is keeping markets near record highs when bonds are working against it? I’m afraid the answer is artificial intelligence (AI). Just a couple of years ago, you had to work pretty hard to use AI. Now you have to work pretty hard NOT to use AI. The hyperscaler companies are the ones that are providing AI to users. They are led by Meta, and Google, and Amazon, and Microsoft. But there are other companies that provide support for AI without actually providing AI. Nvidia is prime among these. It makes the microchips that AI requires. And Caterpillar, long a favorite among value buyers, is now an AI-adjacent play because of the role that it has in building AI data centers. There were people finding gold in the California gold rush, but the people who made the real money were the ones selling shovels and Levi’s.
AI also contributes to an excess issuance of corporate (non-government) bonds to raise money to build data centers. And those bonds provide competition for Treasurys. In a crowded bond market, higher yields are required to lure bond buyers.
Fortune Magazine no longer calls our situation a “K-shaped” economy – one where the rich get richer and everyone else gets poorer. Now they call it a “G-shaped” economy, in which the boomer generation holds onto $90 trillion, and all other generations wait to inherit.
Which reminds me that our website: 80trillionspeaks.com is live and exists only to provide an easy way for you to contact your elected representatives. No fee, no political bias, and no proselytizing, just a portal for you to communicate your concerns to the people who represent you in government. Check it out.
For the week ending on September 4th, the Standard & Poor’s 500 finished at 7,718, the Nasdaq Composite Index at 26,506, and the Dow Jones Industrial Average at 53,414. The yield on the ten-year Treasury Note closed at 4.784%. U.S. crude oil cost $93.87 per barrel, N.Y. gold cost $4,411.48 per ounce, and one Euro was worth $1.16.
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) The Wall Street Journal, The Washington Post, The New York Times, USA Today, The Financial Times, Barron’s, Yahoo Finance, Morning Brew, Bloomberg, Business Insider, 1440 Digest, Axios, Fortune, The Bureau of Labor Statistics, AP, CNN, and Reuters. If you have questions, please call Diastole at 203.458.5220, or email me, Liz Cook, at ecook@dwinvest.com. Thank you for reading!
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