The Dividend Cafe - The DC Today - Thursday, June 8, 2023

Episode Date: June 8, 2023

Today's Post - https://bahnsen.co/3WZi5jG It has not been a great week for global bonds with extra rate hikes as of late in Canada and Australia as of late and a re-pricing of Fed expectations here in the U.S. has kept bond yields on the short end of the curve higher, and even flattened the curve a tad with longer-dated yields coming up. We are still sitting at just a 74% chance of a pause in Fed action next week (in the futures market), meaning there is a 26% chance of another quarter-point hike. But there is a 64% chance of a rate hike in July … In the meantime, jobless claims flew up to 261,000 this week from just 233,000 last week, a large and unexpected move that we will need until next week to see if it is just noise this week or the start of something more substantial. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the DC Today, your daily market synopsis of the Dividend Cafe, brought to you every Monday through Thursday to bring you up-to-date information and perspective on financial markets. Well, hello and welcome to the DC Today Thursday edition. We are getting near the end of the week and we had another up day in market. You had the Dow up 168 points, about half a percent. S&P up a little over half a percent. The NASDAQ up right at 1%. And you had a bond rally as well, which we have not been having lately. But the 10-year saw its yield drop seven basis points down to 3.71%. So mostly up the entire yield curve, you saw a rally in bonds.

Global bonds have been going the other way for much of this week. And last week, you had a reasonably unexpected tone, tenor and activity and rates from both Australia and Canada. And of course, the repositioning around Fed expectations has caused a lot of these rates to kind of push higher, pulling bond prices down. And yet, with the longer end of the curve coming up a bit, it's actually served to flatten the yield curve a little bit, which still, of course, remains inverted. So all that aside, today was a different story. You had a bit of a move to the upside in bonds as yields dropped, and you had another nice little move higher in stocks. The leading sector today was consumer discretionary it was up one and a half percent and the uh worst performing was real estate which was down 60 basis points um and then on the oil

side it stayed at 71 it was down a couple percent but wti uh back firmly above 70 and closing it at $71. What else? As far as the Fed funds futures market goes, and that's a mouthful with a lot of F words there. See what I did there? You have a 74% chance in implied probability right now of a pause. Next week at the FOMC June meeting. That is another way of saying a 26% chance of a rate hike. So, you know, for the most part, by about a three to one percentage, it looks like the Fed will not raise rates, which would be the

first time going back all the way till March or April of 2022, that the Fed hasn't raised rates at one of these FOMC meetings. But in July, the same futures markets are pricing in a 65% chance that they will raise by the July meeting. And so in other words, July meeting. And so in other words, you know, not by overwhelming numbers, but the predominant view right now in futures market, which is subject to change at any time, is that the Fed will not raise rates in June and will raise rates in July. Now, look, the reason I say it's subject to change anytime is we just went through this. I think it had gotten up to over 80% probability that they would be raising rates next week. And then now that's down to 26%. So the Fed will jawbone the way they want this to go.

They will signal and guide and so forth. But right now, that's where things stand. My overall long-term secular view is obviously not a secret. The Japanification idea of what I write about all the time of stagnant growth with downward pressure on bond yields and downward pressure on growth, downward pressure on productivity because of the insane upward pressure in indebtedness and therefore fiscal and monetary policy medicine to deal with that indebtedness. That thesis led one question asker in the Ask David section of DC Today to say, why wouldn't we just load up on 10-year treasuries at 3 point? He had said in the question 3.5%, but I'm going to say 3.7% now since the 10-year has moved higher in the last week or so when this question came in. But why not load up at 3.7% Treasuries 10-year if we see bond yields coming lower? And I think it's a fair question. But of course,

one of the caveats is one doesn't know where bond yields go before downward pressure resumes. And one doesn't know what else may be needed in their bond portfolio up and down other parts of the yield curve. You know, term structure is sometimes more than just picking where the highest yield is. It's trying to measure where you believe different risk reward trade-offs exist at different places in the yield curve. So it's a little more complicated than that.

And yet, do I think just as a general mathematical statement that these yields are not likely to last long? I do. And if something's not likely to last long, it does sometimes behoove you to extend your yield. In other words, take a lower yield now to guarantee a higher yield into the future versus a higher yield now that you will have for less period of time. And so would I load up on this? Well, no, because I wouldn't load up on any boring bonds. I mean, where I can't get growth of income, it isn't ever going to be a core part of my portfolio. But where within someone's portfolio, they have an allocation to fixed income, it isn't ever going to be a core part of my portfolio. But where within someone's portfolio, they have an allocation to fixed income, I certainly can understand that they would not want

everything weighted in the short end of the curve. That the Japanification thesis does say that ultimately people are going to believe a 350 or 370 yield in the 10-year was a pretty darn good deal. I do believe that day is coming. So that was a good question in Ask David. I try to provide good answers to what I think you all are generally sending as good questions each and every day. Thanks for listening. Thanks for reading. Thanks for watching the DC Today. And we look forward to a very special Dividend Cafe tomorrow as my letter to high school graduates is published. Thanks so much. Thank you. way be liable for claims and make no express or implied representations or warranties as to the accuracy or completeness of the data and other information or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change

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