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Week in Review: 18-22 September 2023

News Summary


For more than 212 straight trading days the 10-year yield have held below the three-month yield, a situation known as yield curve inversion. Such an inversion was a predictor of the last eight recessions. The apparent disconnect between the market’s warning and the surprisingly resilient economy shows how much uncertainty has persisted since the Fed started its aggressive rate hikes in March 2022, the steepest increase since the early 1980s.

In October 2022, when the three-month to 10-year segment of the yield curve inverted, the vast majority of economists surveyed by Bloomberg predicted a recession would come by this year. Yet the U.S. economy has continued to expand. The inverted yield curve can be a self-fulfilling prophecy. That’s in part because its successful track record may cause businesses and consumers to cut back, seeing it as an accurate predictor of trouble ahead. It also ripples through the credit system by giving banks less incentive to extend loans, since they borrow at short-term rates and lend at long-term ones.



The Federal Reserve Bank of New York’s Center for Microeconomic Data released the August 2023 Survey of Consumer Expectations, which shows that inflation expectations were largely stable. Income growth perceptions declined in August, and job loss expectations rose sharply to its highest level since April 2021. Perceptions about current and future credit conditions have deteriorated. Households’ perceptions about their current financial situations and expectations for the future also deteriorated.



Nikola Corporation is asking dealers and customers to return battery-electric trucks under recall for possible battery fires, despite the company still working on a fix. Nikola announced a safety recall Aug. 11 for trucks in dealer or customer possession following a second fire in a battery pack.

“We’re bringing them back to Coolidge for repairs to be made instead of in the field,” spokesman Dan Passe told FreightWaves in an email.

The recall said the trucks were safe to drive as long as the main battery disconnect switch was in the “on” position allowing Nikola to monitor the trucks remotely

 

 

This was a FED week. The Federal Reserve kept the target range for the federal funds rate at a 22-year high of 5.25%-5.5% in its September 2023 meeting, following a 25bps hike in July, and in line with market expectations, but signaled there could be another hike this year. Projections released in the dot-plot showed the likelihood of one more increase this year, then two cuts in 2024. Policymakers now see the FED funds rate at 5.6% this year, and 5.1% in 2024. Meanwhile, GDP growth is seen higher in 2023 (at 2.1%) and 2024 (at 1.5%). PCE inflation was also revised slightly higher to 3.3% this year but was kept at 2.5% for 2024. The core rate is expected lower in 2023 (at 3.7%) but was left unchanged for 2024 (at 2.6%). The unemployment rate is projected lower at 3.8% (vs 4.1%) in 2023 and 4.1% (vs 4.5%) in 2024.

 

Elsewhere, the Bank of England held its policy interest rate at 5.25%. The Bank of Japan (BoJ) maintained its key short-term interest rate at -0.1% and that of 10-year bond yields at around 0% in its September meeting.


Regarding the financial markets, for the week, the main stock market indices are down, with the S&P500 losing 2.9%, the NASDAQ 100 down 3.3%, and the RUSSEL 2000 3.8% in the red. Gold is unchanged and silver gained 2.3%. The barrel of WTI dropped 1% and is now around 90$/barrel. Bitcoin is unchanged and around ~26500$.

The relative strength of the US dollar rised 0.2%, and bond yields increased slightly. US bond yields now sit at 4.44% for the 10-year and 4.53% for the 30-year. The US bond yield curve remains inverted and is now peaking at 5.54% in 6 months from now.


Sources:

https://financialpost.com/investing/bond-market-recession-alarms-as-economy-remains-defiant

https://www.newyorkfed.org/newsevents/news/research/2023/20230911

https://www.freightwaves.com/news/nikola-asks-customers-to-return-electric-trucks-at-risk-of-fires

https://tradingeconomics.com

 

Comment

The stock markets have dropped considerably this week, in reaction to the "higher for longer" stance of the Federal Reserve. Although stocks seem oversold, we need to see a positive reaction in the next days, otherwise the sentiment may quickly turn bearish. Pay attention to this in your trades, if any.

Regarding the housing market, it evolves slowly, and price drops will only be really felt next year. The over-investment in AIRBNB units may contribute to the increase in inventory if the business conditions deteriorate. We would say that now is not the best time to enter into real estate...let's wait just a bit longer.

Have a nice week.

 

 

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