10-Chart Monday (9/26/22)

By Charlie Bilello

26 Sep 2022


Notes:

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10 charts and themes from the past week that tell an interesting story in markets and investing

1) 5 Hikes Down, 3 to Go?

The Federal hiked rates another 0.75% last week, the 5th rate hike of the year. That brings the Fed Funds Rate up to a new range of 3.00-3.25%, the highest we’ve seen since January 2008.

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Is the Fed done?

Not just yet.

We’re seeing a completely different Jerome Powell these days from what we saw two years ago. It’s hard to believe, but in 2020 the Fed was actually hoping that inflation would run above its 2% goal “for some time.”

The saying “be careful what you wish for” certainly comes to mind as inflation hit 9.1% this June, its highest level in 40 years. Which brings us to today, where Powell seems to be channeling his inner Volcker in portraying the Fed’s resolve when it comes to breaking the back of inflation.

At the FOMC Press Conference, he had this to say: “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all … We will keep
at it until we are confident the job is done
… Restoring price stability will likely require maintaining a restrictive policy stance for some time.”

What that means is there are more rate hikes to come and a faster shrinking of the Fed’s balance sheet, which has been unwinding at a snails pace (only $149 billion from its peak and still above where it started the year.

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What are markets now expecting in terms of rate hikes?

75. 50. 25. 0.

Translation: A 75 bps hike in November, 50 bps hike in December, and 25 bps hike in February of 2023. If the market is correct, that would mean another 1.50% of rate hikes before a pause at a peak Fed Funds Rate of 4.50-4.75%.

2) There Is An Alternative

The Fed’s normalization of interest rates is finally laying to rest the longest-running acronym in markets: TINA (There Is No Alternative).

A rallying cry of the bulls for over a decade, it was said that equities were the only option for investors seeking a decent return on their money.

But the game has changed with FDIC-insured savings accounts now offering 3% rates for the first time in nearly 15 years.

If you’re able/willing to lock your money up a bit longer, the reward goes up to over 4% for 1, 2, and 3-year Treasury bills. Back in 2020 someone told me we would never see 4% yields on government bonds again because of the 3 D’s (Debt, Deflation, Depression). Never say never in this business.

3) The Downside of Debt

While savers have been the beneficiaries of rising rates, debtors are starting to feel the pain. And with the National Debt closing in on $31 trillion (up from $23 trillion at the start of 2020), the US government is at the top of that list.

The Interest Expense on US Public Debt rose to $716 billion over the last 12 months, a record high. If it continues at the current monthly pace, it will soon be the largest line item in the Federal budget, surpassing Social Security.

4) House Poor

Rising interest rates continue to wreak havoc on the housing market. The median American household would now need to spend 44.5% of their income to afford payments on a median-priced home in the US, the highest percentage on record with data going back to 2006.

The biggest reason for the recent surge: rising mortgage rates, which have more than doubled since the start of the year. 30-year mortgage rate in the US has now moved up to 6.29%, its highest level since October 2008.

The lack of affordability is driving a significant slowdown in the housing market.

The US Housing Market Index (measure of homebuilder confidence) fell for the 9th straight month, lowest levels since May 2020. 24% of homebuilders reported reducing home prices, up from 19% last month.

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Existing home sales fell for the 7th consecutive month, down 20% over the last year and at their lowest levels since May 2020.

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We’re just starting to see the impact of lower demand on prices. The median price of an existing home sold in the US has fallen 5.9% from its peak in June, the largest 2-month % decline since 2013.

5) Last of the Negative Yielders

In May 2020, there were 21 countries around the world with negative yields. Switzerland actually had a negative yield on its 50-YEAR government bond (no, that’s not a typo).

Fast forward to today and only one country with negative yields remains: Japan. But that too may soon change with inflation in Japan rising to its highest levels since 2014 (3%).

6) Dollar Dollar Bill

The US Dollar Index is at its highest level in over 20 years (since May 2002), up 58% from its low in 2008.

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On the other side of this trade is the currency depreciation in nearly every country around the world.

The British Pound has fallen to its lowest level since 1985 against the US Dollar, down 46% from its peak in 2007.

One of the reasons: the weakening of the UK economy, which appears by all accounts to be in a recession. UK retail sales volumes are down 5.4% over the last year, the 5th straight month of negative YoY growth.

7) Delivering Bad News

Speaking of recession, FedEx is now down 52% from its high. The 3 prior 50+% drawdowns in its history all occurred during recessions (1991-92, 2008-09, 2020).

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The 21% decline in FedEx stock ($FDX) on September 16 was its largest daily decline ever (IPO was in 1978). Before that its largest loss was -16% on Black Monday (October 19) in 1987.

After reporting weak earnings, the FedEx CEO said they are seeing a “volume decline in every segment around the world.” Noting that they are a “reflection of everybody else’s business,” the CEO believes a global recession is coming.

8) The Inversion Continues

The spread between 10-year and 2-year Treasuries, which first inverted back in April, continues to move deeper into negative territory.

The 10-Year Treasury yield (3.69%) is now 51 bps below the 2-Year (4.20%), the most inverted yield curve we’ve seen in the US since April 2000.

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Back then, the expansion peaked in March 2001. Today, many believe we are already in a recession.

If that’s the case, it would be the shortest lead time we’ve seen from the inverted yield curve signal.

9) Worst Year in History = Better Years Ahead

The 10-Year US Treasury bond is on pace for its worst year in history with a loss of 15.9%.

Investment Grade Corporate bonds are down 16.8%, their worst year ever by a wide margin.

That’s the bad news, which should have been a surprise to no one given the worst risk/reward in history that came with yields hitting all-time lows in 2020.

But the good news is the future will undoubtedly be better than the recent past.

Why? Because the single best predictor of future bonds returns is their starting yield, and now at least there’s a yield to start with.

That’s true for investment grade corporate bonds as well, where we haven’t seen 5% yields in over a decade. Today’s yield is more than 3x higher than the all-time low of 1.79% in early 2021.

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10) Some Signs of Lower Inflation to Come

Market-based inflation expectations have moved down to 2.38%, their lowest levels in 15 months and over 1.2% below their peak in late March (5-year breakeven rate).

Global container freight rates hit an 18-month low last week, down 61% from their peak.

Crude Oil is down nearly 40% from its peak in March. The year-over-year increase of 7% is the first time it’s been below CPI (currently 8.3%) since early 2021.

Used Car prices are down 13% over the last 9 months, at their lowest levels since last September. This was a leading indicator of higher inflation rates in 2020 and the recent downturn is likely a leading indicator of lower inflation rates to come.


And that’s it for this week.

Have a great week everyone!

-Charlie

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About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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