The Dividend Cafe - The DC Today - Thursday, September 28, 2023

Episode Date: September 28, 2023

Today's Post - https://bahnsen.co/468UHnU This morning, we had a slew of economic data that moved markets modestly to the upside in stocks and bonds in a fairly positive trading day throughout the session. Q2 GDP revision was largely unchanged, jobless claims were better than expected, and Core PCE revision was also unchanged. Yields moved lower across the curve following the releases, which put some wind in the sails for most risk assets today. The inverted yield curve is slowly but surely becoming less so as longer rates rise, and is now half of what it was a month ago at 47 bps on 2/10’s from over 100 bps. With short rates anchored closer to Fed Funds, why are longer rates moving higher? A combination of the Fed’s QT, Japan’s exit of Yield Curve control, US budget deficits and less Treasury demand from China on falling exports. 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. Hello and welcome to DC Today. My name is Brian Saitel. It's good to be with you all again this afternoon. It is Thursday, September the 28th already. So we're in the last week of September here, getting close to fourth quarter.

Fairly modest, mostly higher day on the market, which was nice to see. We've had kind of a tough month here. The Dow's down about 3% or so far in the month of September. So nice to see a little bit positive day. And there was a couple of different pieces of economic data that came out that sort of put a little bit of the wind in sales behind some risk assets, both in stocks and bonds. The market closed up 116 points on the day. Kind of a tight range, too.

It was nice to see kind of a lack of volatility. Volatility had been rising the past couple of, well, really for the month, but especially the past week or so. And we saw the VIX come down about 4% on the day. month, but especially the past week or so. And we saw the VIX come down about 4% on the day and interest rates across the curve after this data that came out that I'll explain were a little lower. And so we've seen rates pop up quite a bit this month and that came off a little bit. So stocks built a little bit better, which means bond prices were a little bit higher and again, volatility lower. So the data that we saw was really revision. So we had a GDP number for Q2 revised to be in line in the same. There was a component of it, which was the

consumer spending part of it, consumption, which really came down quite a bit inside of that number. It was a 1.7% attribution before, and now it's only a 0.8%. So it's come down by about half. attribution before. Now it's only 0.8. So it's come down by about half. And believe it or not, I think that was perceived as somewhat good. It means that spending is slowing a little bit, which means that the economy is cooling a bit. It kind of gives a little bit more to the camp of the Fed has basically done raising rates. Core PCE for the quarter today came in also unchanged. It was for the quarter 3.7. Year over year is going to get revised tomorrow. So is the month of August, we'll get revised tomorrow. So this might change a little bit. But I added a little note that if year over year core PCE is something like 4.2% right now, and it's expected that it might take

a little lower tomorrow, maybe go to 3.9. But if Fed funds is somewhere between five and a quarter and five and a half, and you have core PCE at right around 4.2, then you've got a real Fed funds rate, meaning what's over inflation of a little over 1%, which is in restrictive stance. That's what the Fed has done. They've taken real rates above inflation that is designed to bring economic activity down a little bit to cool the inflation numbers that they're trying to get to. If you look at other recessions, say, for example, other periods of time where we entered into recession, restrictive territory was between 3% and 4%. So we're a little over 1% now. I wouldn't read into that a ton just other

than to say that, yes, it's restrictive, but it isn't as restrictive as it has been to cause an actual contraction before. There was a comment out in that segue, there was a comment out today from Fed President Goolsbee, who's fairly followed. He's a voting member of the FOMC, basically said as such, he thought that rates were already restrictive enough that they did not need to move anymore. And this will bring inflation down to their target as is. And that that can be achieved without a sharp rise in unemployment and a sharp, you know, economic recession, a contraction. I actually don't agree with him often on other things. But I guess as a Fed president, I would agree with that statement.

The two tens yield curve spread. So we've been watching this been inverted for a year, other things. But I guess as a Fed president, I would agree with that statement. The 210s yield curve spread. So we've been watching this, it's been inverted for a year. It was over 100 basis points inverted. It is now only 47 basis points or thereabouts. It moves a little bit after the market closes. It's indicative of a lot of things. Short-term rates are tied to Fed funds. Long-term rates float with market conditions globally. And so having some long-term rates move higher, which is what we've seen this month, the 10-year was over 4.6%, closed below that, closed at 457 on the day. But longer-term rates moving higher, I had some comments on some of the factors that could be causing some of those

things. Ultimately, interest rates are more a reflection of inflation expectations than they are a lot of other things. But does a sovereign debt downgrade in the US matter? Does Japan ending its yield curve control matter? Does the Fed's quantitative tightening campaign matter? I would say yes. I don't know that it's one thing in and of itself, but a combination of all of those things. And then frankly, just we're in deficits right now. We're deficit spending in a country that has completely full employment. So that's not a good thing. And I think all of those things matter with long-term interest rates.

And it's sort of be careful what you wish for. It's like the yield curve is inverted. Yes. And that is a sign of something not quite right. Usually it means the Fed has overtightened.. And that is a sign of something not quite right. Usually it means the Fed has overtightened. And often that can lead to recession. So that's it's a predictive mechanism, historically, but not every time. And but having it uninvert, because long term interest rates are going higher, because of all those other factors, isn't necessarily a good

thing either. And so what I said about real rates being restrictive, as inflation comes down, that restriction goes higher because the Fed funds is going to stay the same and then inflation is going to go lower. The real number is going higher. And again, that's why we've seen that three and 4% range in the past. The pending home sales on the day were down 7% for the week. Over on the year, it's down 18 and a half percent, 18.7% on the day, we're down 7% for the week. On the year, it's down 18.5%, 18.7% on the year. So it's still the same story. Housing is still basically stuck. There's no inventory.

Prices are staying solid, which I suppose is supportive for things. But until interest rates come down, until there is an ability for people to move, until inventory picks back up, I still suspect we'll sort of stay in this kind of stuck area with housing. And I think you're seeing that in the pending home sales. There's just not a lot of transactions happening. So let's see. For that, I think that was a pretty good kind of around the horn on the day. Tomorrow, we have, like I said, monthly PCE numbers from an inflation read that'll be important to look at. We'll have Dividend Cafe in your inbox as well.

And we'll kind of go from there. But with that, it was great writing for you today. I always enjoy it. Thanks for being here. And reach out with questions. I love to hear from you. Okay, have a great night. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities. No investment process is free of risk. There's no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a

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