The Dividend Cafe - The DC Today - Wednesday, June 28, 2023

Episode Date: June 28, 2023

Today's Post - https://bahnsen.co/3XrRlJ6 At the ECB Forum in Sintra Portugal – Powell, Lagarde, and Baily all had hawkish comments on inflation and tighter central bank policy needed to contain it. However, all three felt that could be done without inevitably causing a recession. 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, Wednesday, June 28th. Brian Seitel here with you. Kind of a quiet day in market action. The Dow closed down about 74 points on the day. It was basically down the entire day by about that much. I think at one point it might have been down 150

or so, but not more. And just sort of traded sideways. Interest rates on the day were slightly lower after yesterday's backup. So we had 10 year close at about 371, which was down five basis points on the day. So kind of a quiet summer day in trading. The biggest news really was around a central bank summit in Portugal, in central Portugal, where there was sort of most of the major central bankers around the world on stage discussing policy, discussing their policy and where interest rates might go and inflation and all these sorts of things. Powell, the US central banker, obviously kind of reiterated the same, basically that more rate hikes were on the table. And not only that, but that consecutive rate hikes could be on the table as well. So read into that what you might.

The Fed futures right now is pricing in like a 75% chance for a rate increase in July, which was up a little bit on the day following his comments. But it's data dependent. He was asked at one point if he thought the inflation rate would get back to 2%, which is the target. When he thought that would happen, would it be the end of next year, end of this year, that type of thing. And he said, basically not until 2025. So yeah, the comments were more hawkish than I think what had been predicted. Lagarde in the ECB, so Central Bank of Europe, also said that there was kind of more work to be had as far as getting inflation lower. She did sort of say that, well, it's perfectly possible for a recession in Europe, but it wasn't

her expectation. And frankly, I don't really know what central bankers are supposed to say when they're asked that question. Of course, they're not going to most of the time figure that they can get it right and sort of have this sort of soft landing with with the economy and still being able to get inflation lower um the uk where inflation is by far the highest in the g7 at least i said the same thing although i i thought it was a tell a little bit the banker there his name is bailey you know their fed fed futures for the boe is predicting something like a terminal rate at six and a quarter at this point. He basically said, well, we'll wait and see what data comes in, if we'll actually get to that number. But all that to say that the one outlier of those big central bankers was Japan,

which is UADA. They still have Fed policy at zero. In fact, it's lower than zero. They have a central bank policy rate at negative 0.1%. And then they're manufacturing interest rates on the longer end of the curve called yield curve control to keep interest rates low. And they're doing that because inflation is higher than it has been the past couple of decades. It's still somewhere around 2%, give or take. I think it's actually a little above that right now. And I actually, I don't know that they would say this, but as far as most of the rest of the developed world being at three and a half to say five and a half on interest rates, and then the Bank of Japan, the BOJ at basically negative 0.1, you just have to realize what that does to currency. The yen is like 144 to one

right now against the dollar. So it's really weak, historically weak, weaker than it's the the yen is like 144 to 1 right now against the dollar so it's really weak historically weak weaker than it's been in 20 years i think it was a little weaker maybe recently but i mean more or less it's the week as it's been in 20 years so if you're an exporting nation selling widgets across the world and you're able to sell them cheaper that gives you a competitive advantage aka the china rule book for many decades. So I don't know that they're necessarily upset about that part of it, but we'll see how that plays out. All this to say, inflation is coming down. The economy is holding in. I do think it's of note that the debt in this country, the US government debt is up 25%. So the total amount of debt is up something like 25%

just in the last three years. So it's a pretty extraordinary thing when you think about that. We've talked about this a lot with the amount of indebtedness and what that does to longer term inflation, it tends to bring it down. You've pulled forward expenditure by issuing that debt

to consume now and to spend more now. And that, of course, hurts the future if you're having to pay for that. The debt service cost in this country has gone up from about $1 billion a month to about $2 billion a month just in the past two years. So at some point, this stuff matters. And I do think, as we've talked about with Japanification, or David has quite a bit, I think last week's Dividend Cafe was on the topic. You can sort of see the difference in some of those central bankers' comments and how that sort of plays out. On the consumer side, on the household side in this country, also just remember that while the consumer is still very

strong, the balance sheet is strong, spending ability is still there. One of the larger costs, which is housing, mortgage payments have gone from about $1,500 a month to about $3,000 a month, so doubled. Same thing as the interest expense of the government over the past couple of years. And all those things will come into play as far as the ability to keep consuming and keep spending in perpetuity and what that ultimately means for inflation. Other news today, the US is thinking of curbing exports of AI chips and cloud services to China. So it's just kind of further scrutiny, I guess, over the national security, over some technology export to China and so forth. There was some positive news, I thought, this is kind of a small tidbit, but I get a lot of questions on commercial real estate in the country and if it's safe and people aren't going back to work and so office space must be worth less and

all those sorts of things. There was actually a large transaction in New York City today from technically the landlord that we work with there, SL Green, on a place on 245 Park Avenue was far above what was expected. So that's a small little takeaway. But the point is that people are going back to work, whether it's New York or across the country. And I just don't think with the protective equity in commercial real estate, that the fears that are out there can end up coming to fruition as far as regional bank lending and those types of things. So more to say there. But all in all, kind of a quiet summer day in markets. I'm not going to go on here further. I wanted to give you this and I'll end it there on the day. I'll be with you back tomorrow. There's a bit more economic data

on the calendar for tomorrow. So I'll kind of go through that. There's a revision on GDP. I know there were some jobless claims that we're going to get and some housing numbers as well. So I'll have plenty for you tomorrow. With that, I wish you all a very nice evening and I shall talk to you soon. Thank you.

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