The Dividend Cafe - The DC Today - Tuesday, August 8, 2023

Episode Date: August 8, 2023

Today's Post - https://bahnsen.co/3OoSkpj From what I had initially thought would be a relatively quiet day in markets given the economic calendar, we ended up with a good amount of news to chew through in choppy markets with stocks selling off, a bid in bonds and volatility continuing its week-long climb. China reported softer than expected trade activity in exports and imports, reflecting its continued anemic recovery post-pandemic and further softness in its attempt to shift more towards a consumption-based economy. Following Fitch's downgrade on US debt last week, Moody's joined the downgrade party lowering the credit rating on ten small and mid-sized US banks today, issuing a negative outlook on over a dozen larger banks. Higher rates, an inverted yield curve, and concern in commercial real estate, not to mention the stress earlier in the year with SVB/FRB, all seem well-known at this point, so this felt a bit behind the curve. Stocks traded lower on the news down over 450 points by mid morning before regaining through the rest of the day closing down only modestly. All fully unpacked in the podcast video link below. 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 DC Today. It is Tuesday, August 8th, and Brian Seitel here with you. August 8th. And Brian Seitel here with you, go through the markets. And what I thought would be kind of a quiet day just early this morning before the markets looking over the economic calendar ended up actually having some action to it. So I hope you like the write-up I did, and then we can kind of go through the action on the day. Markets traded off lower right away. The futures were down, so I sort of knew that it was going to be a little lower day, but we traded as low as about 450 points by about 11 o'clock or so Eastern. So it was a decent down day. Obviously we had an up day yesterday. So it was giving back what we had gotten the day before. But for the rest of the day, we basically traded higher and we slowly,

steadily just kind of climbed out of it. regained almost two thirds of that drawdown, 300 points or so. We ended up closing down 158 points on the day. The 10-year was lower by six basis points. Bonds had rallied a little more earlier in the day and came off that a little bit. So a little bit lower rates across the curve on the day. The big news, which I think is what drew down markets initially, was a downgrade by Moody's, which is a credit rating agency, just like Fitch is. Fitch downgraded the U.S. debt last week, a week ago today. So I'm sure this wasn't the reason, but it just sort of felt like they missed out on the downgrade party and wanted to jump on that train. So they downgraded part of the banking sector. So this is the small and mid-sized banks.

There was 10 of them. And those were down. They traded lower on the day. They basically were citing things like higher funding costs, higher interest rates, potential economic slowdown, and then exposure to commercial real estate. Well, all that's been pretty known. In fact, it was known, especially several months ago when we had actual bank failures in that sector with Silicon Valley Bank and then First Republic. So all of the info is known. Pretty much no interest rates are high and commercial real estate has come down a little bit. So I felt it was a bit behind the curve to downgrade them at this point.

But so be it. They did give a negative issue and some credit warnings on some of the big banks. So this is stuff like U.S. Bank Corp., Northern Trust, State Street. So that's more meaningful if they actually go through and end up downgrading some of those banks. You can see higher capital requirements and different things that could come to fruition there. But we'll take that as it comes. China had some pretty significantly lower trade data on the day. They saw imports, which is a reflection of domestic demand in the country, drop 12.4% from last year. And that's for the month of

July. So pretty big drop on imports. And as China sort of is trying to get their local economy, their domestic economy, to be a consumption-based economy, similar to what the US has, where 70% of our GDP comes from consumption, that's their shift and that's their aim. And they've been stimulating and building and hopes to do that. It hasn't fully played out that way yet. It's still trying to wean itself off of being an export country. So the export figures out of China were what was more notable because they were down 14.5%. And that's a big drawdown. It's basically the same amount, or the last time it was that significant was right during the pandemic in February of 2020. So shifting global demand and policy changes in the West, of that drawdown in exports,

the US and Europe was a bigger contributor to it. So some of those Western policies and shifting supply chains and things, and those aren't really transitory deals. Once you start moving plants and producing things elsewhere, it's not so quick to just move it back. So I think China is sort of feeling that on both sides of it. So they have a slowdown. There was news out on Financial Times a couple of days ago that the local government, so, you know, Beijing basically was trying to curtail the negative talk on their economy. And so I think that it's real if that's happening, if they're trying to do something like that. But all that to say, look, we're still talking about an $80 billion surplus for the

month, you know, in China. So it's still the second largest economy in the world. It's incredibly important. But when you see slowdowns like that and anemic recovery post-pandemic, it speaks to lower inflation, at least there. In fact, you know, disinflation significantly. They've let their currency get a little weaker too. And I suspect that's to try to boost exports. So we'll see over time there. The deficit in the uh, deficit in the U S was also out today and we actually came in about 4%, which is great. We're still at 65.5 billion for the month, but, um, the deficit with China specifically was lower by about 2.1 billion at about 22.8 billion total. So, um, again, you're seeing some shift in policy there. That deficit has come in. Last year, we were at $216 billion as of this date, a little more than halfway

through the year. And now this year, we're at about $142 billion as a deficit just with the country of China. So those things are shifting. And we're seeing that in the numbers. There was a couple of Fed presidents talking today. The Philadelphia Fed President Harker, who is a voting member of the FOMC, so his words are taken as important as they are, was saying, you know, barring some other significant change in data that he thinks pausing here, it makes sense. And we'll kind of let things play out with the rate policy that they've set. And they're already seeing a meaningful drawdown in inflation. And so that was deemed as sort of a feather in the cap for the soft landing folks. And actually, some of those comments did come out when markets started to recover on the day. Because also there was the Richmond Fed President

Barkin said basically the exact same thing, that so long as nothing changes, they're all good to keep it as a pause. Williams was out yesterday, another Fed President, and said the same thing. So there's an 88% chance as of today, I think it was 84% yesterday. So we're inching towards 100. But we're at an 88% chance that they're sort of done with rate, rate hikes from here. So there's a CPI number on Thursday, which we wrote about a little bit, and that'll be looked at a lot. That's for the month of July. And it may take up a small amount. I think 3.2 is what's expected year over year. But barring that changing, and then there's a PPI number on Friday. If those things sort of come in line, then I think those chances of a

Fed pause will stay there. And I think that's what ultimately will happen. But all that to say, it was a down day, but not so bad. Obviously, yesterday was an up day. Some data, but not a lot. Tomorrow, there's not a lot of economic data that comes out. So we'll see what goes on in the trading day. But do reach out with questions. Love to hear from you. Love to answer those questions anytime. And with that, I shall let you go and enjoy your evening. Thank you for listening to DC Today. 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 is no guarantee that the investment process or investment opportunities referenced herein will be profitable.

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