News Summary
On the beginning of the week, Federal Reserve Bank of Dallas President Lorie Logan said the recent surge in Treasury yields may mean less need for the US central bank to raise its benchmark interest rate again.
“Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal,” Logan said Monday in remarks at the National Association for Business Economics meeting in Dallas.
Philip Jefferson, vice chair of the Fed’s board and a close ally of Chair Jerome Powell, said that he would remain cognizant of the higher bond rates and keep that in mind as he assesses the future path of policy.
These dovish speeches calmed the bond market after the spike in US long-term yields that we saw in the previous week.
President Joe Biden on Tuesday said he would ask Congress to take “urgent action” to aid Israel after what he called “sheer evil” attacks by Hamas.
“When Congress returns we’re going to ask them to take urgent action to fund the security requirements of our partners,” the president said from the White House. He said the U.S. is already surging extra military aid including ammunition to replenish Israel’s Iron Dome defense system.
The carrier USS Gerald R. Ford and her escorts have arrived in the Eastern Mediterrranean, sending a message of support for Israel and a warning to other regional players like Iran and Hezbollah. In addition, the U.S. is considering the possibility of sending a second aircraft carrier to join her.
In just two days, Ford steamed from Italy to Israel, accompanied by the cruiser USS Normandy and the destroyers USS Thomas Hudner, USS Ramage, USS Carney and USS Roosevelt.
"The arrival of these highly capable forces to the region is a strong signal of deterrence should any actor hostile to Israel consider trying to take advantage of this situation," said General Michael "Erik" Kurilla, commander, U.S. Central Command.
On the economic front...Producer prices in the US rose 0.5% month-over-month in September 2023, the least in three months, following a 0.7% rise in August, but above market forecasts of 0.3%. Goods prices were up 0.9%, prompted by a 5.4% surge in gasoline cost. Prices for jet fuel, processed young chickens, meats, electric power, and diesel fuel also advanced.
The US inflation rate remained steady at 3.7% in September 2023, defying market expectations of a slight decrease to 3.6%, as a softer decline in energy prices offset slowing inflationary pressures in other categories. On a monthly basis, consumer prices advanced by 0.4%, easing from a 0.6% gain in August, but exceeding market expectations of 0.3%, while the core rate remained unchanged at 0.3%.
The annual core consumer price inflation rate in the United States, which excludes volatile items such as food and energy, fell to 4.1% in September 2023, the lowest since September 2021.
The University of Michigan consumer sentiment for the US fell to 63 in October 2023, preliminary estimates showed. The gauge for current economic conditions fell to a five-month low and consumers’ future expectations retreated. Year-ahead inflation expectations rose to 3.8% from 3.2% in the earlier month. "Assessments of personal finances declined about 15%, primarily on a substantial increase in concerns over inflation, and one-year expected business conditions plunged about 19%. However, long-run expected business conditions are little changed, suggesting that consumers believe the current worsening in economic conditions will not persist.", Surveys of Consumers Director Joanne Hsu said.
Regarding the financial markets, for the week, the main stock market indices are mixed, with the S&P500 up 0.5%, the NASDAQ 100 up 0.2%, and the RUSSEL 2000 2.2% in the red. Gold is down by 0.8% and silver lost 1.5%. The barrel of WTI is up 6.0% and is now around 88$/barrel. Bitcoin dropped slightly and is now around ~27000$.
The relative strength of the US dollar rised 0.5%, and bond yields reversed down. US bond yields now sit at 4.61% for the 10-year and 4.76% for the 30-year. The US bond yield curve remains inverted and is now peaking at 5.57% in 6 months from now.
Source:
https://www.bloomberg.com/news/articles/2023-10-09/fed-s-logan-says-higher-yields-may-mean-less-need-to-raise-rates
https://apnews.com/article/inflation-federal-reserve-economy-interest-rates-79fdf75d519ec3d05c8dd485552834e3
https://www.marketwatch.com/story/biden-to-ask-congress-for-urgent-action-to-help-israel-after-sheer-evil-hamas-attacks-1570920b
https://www.maritime-executive.com/article/report-white-house-may-send-second-carrier-to-show-support-for-israel
https://tradingeconomics.com/
Opinion Section
The war in the middle east, supported by the US, is a new motivation for deficit spending and reminds us of the ongoing war in Ukraine, and the tensions between China and the US over Taiwan. Geopolitical instability persists. The bond markets are calmer, for the moment, but we cannot rule out a new surge in yields in the near future. As the inflation stabilizes and fuel prices remain elevated, the consumer sentiment starts degrading, resulting in less discretionary spending. We forecast a scenario of stagflation for for the foreseeable future, where growth is anemic and inflation remains considerably elevated, around 4%. Any investments need to have in consideration higher inflation rates than we have been used to in the past decade.
Have a nice week.
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