This week saw two pieces of economic data that set the pace for the future of interest rates – the main focus for the current economic landscape. Those data points were both the GDP data and Personal Consumption & Personal Consumption Expenditures Index (pictured above – Core Rate). The PCE Index is the preferred inflation index for the Federal Reserve. While the market gets a look at inflation earlier with CPI, the PCE index is what the Fed looks at for determining inflation – it is slightly more sensitive.
Inflation remains high with an economy that remains robust (as noted with the recent GDP growth rate that went higher for the quarter with the latest revision). This will pressure the Federal Reserve to keep interest rates higher for longer, if nothing more. The question is: will the Fed have to raise interest rates further?
Based upon the information we have right now, there is pressure and hope. My belief is that, given he information we have available at this time, that the employment rate is still far too high and has been for far too long, along with a M2 Money Supply that is too big for too long, and that inflation is likely to not be contained as the Fed prefers. I do not believe that the current economy will allow for inflation to drop down magically to 2% – eventually, higher inflation increases will show up and the Fed will be forced to take steps.
In the meantime, there is still a lot of pressure on equities.
SPY Stock
This week saw more pressure overall on equities. The idea that the Fed is done is pressuring stocks more and more. The Fed is meeting next week and they are likely to reiterate that they are not happy with persistent inflation and that the robust economy needs to be curtailed. On the one hand, the balance sheet for the Fed is shrinking, but the M2 Money Supply is growing. This is counter-intuitive but, it is an effect, not a cause. Higher interest rates are attracting more outside investors to buy debt instruments.
The VIX – UVXY Stock
This week’s activity saw pressure in equities and hedgers & speculators bought puts. This pushed the VIX upward – along with UVXY stock. Going in to next week, on the one hand the Fed meeting on Wednesday is likely to produce both a calming effect in the market as investors will be loath to front the Fed, but they may buy both puts & calls on SPY stock.
At the same time, employment numbers will hit on Friday and this could send bond yields much higher very quickly. That would send stocks lower, and puts are likely to be bought up, sending the VIX & UVXY stock right back upward.
US Treasury Yields – TLT Stock
The 10-Year US Treasury pressed higher this week, but failed to hit its most recent highs – this, sending TLT stock lower respectively. Next week’s data will largely determine the future outlook for bond yields more so than the current inflation data that hit this week.
Regional Banking Sector – KRE Stock
On another note, and to the effect of higher bond yields, KRE stock – the Regional Banking ETF, saw a large slide lower on concerns of both higher interest rates affecting their respective portfolio valuations, as well as concerns of balance sheets where there are banks holding too much debt that may go negative. Banks holding mortgages on office complexes are likely to see this paper go bust.
Gold – GLD Stock
The latest out of the Middle East had spooked markets in to rushing into gold & GLD stock. While the conflict is still ongoing, the idea that this could spill over into a much bigger conflict is, at this point, overblown. On the one hand, there are warranted risks. But, the reality is that this will likely remain contained and there will ultimately be a conclusion. I expect GLD stock to fall eventually, but maybe it remains pressured to the upside for some time.
Oil USO Stock
Oil is very likely to see more pressure to the downside as supplies are mounting and geopolitical pressures ease. Gasoline supplies have been stacking up and because of that the price at the pump is falling. This will translate in to less demand for oil, which in turn will translate in to more supplies and lower price. Coupled with this will be an economic contraction that will likely weigh on demand as well, and the recipe for gasoline prices to fall below $3.00 nationwide is there – along with USO stock dropping below $75.00 and staying there.
US Dollar Index
The US dollar has appreciated as a safe-haven for the world during an amount of economic uncertainty coupled with higher interest rates. The US Dollar Index is still lofty and as long as interest rates are presumed to be heading higher, the index will do the same. But, if there is an appearance that the Fed has hit its ceiling, the index will then fall more and more.