VerySmartInvesting: Markets were little changed on recession fears

Wednesday, May 10, 2023

Markets were little changed on recession fears

Dow finished down 30, advancers over decliners 4-3 & NAZ added 126. The MLP index hardly budged in the 216s & the REIT index went up 2+ to the 371s on lower interest rates. Junk bond funds remained weak & Treasuries continued to be purchased. Oil was down 1+ to the 72s & gold lost 3 to 2039 (more on both below).

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Even with inflation running well above the Federal Reserve's goal, markets became more convinced that the central bank will be cutting interest rates by as soon as Sep. The annual inflation rate as measured by the consumer price index fell to 4.9% in Apr, its lowest level in 2 years but still more than double the Fed's 2% target. Still, it was enough for traders to raise the chances of a Sep rate cut to near 80%, according to the CME Group's Fed Watch tracker of prices in the fed funds futures market. In fact, the Oct fed funds contract implied a policy rate of 4.84%, or nearly a full qtr point below the current effective rate of 5.08%. Among analysts & economists, though, the case for a rate cut remains shaky. The bar seems high for a rate cut, even if central bankers decide they can halt increases for now. New York Fed Pres John Williams, an influential policymaker & voter on the rate-setting Federal Open Market Committee, said yesterday he doesn’'t expect that policy will ease at all this year, though he left open the possibility beyond that. “In my forecast, we need to keep a restrictive stance of policy in place for quite some time to make sure we really bring inflation down,” he said. “I do not see in my baseline forecast any reason to cut interest rates this year.” Still, markets are pricing in multiple cuts for 2023, totaling 0.75 percentage point, that would take the benchmark rate down to 4.25-4.50%. The central bank raised its fed funds rate last week by a qtr point, to 5.00-5.25%, its 10th increase since Mar 2022. Policymakers likely will continue to douse those expectations for easier policy in future months, even if they choose not to raise rates. The Apr CPI report provided mixed signals on where inflation is headed, with the core reading, excluding food & energy costs, holding fairly steady at 5.5% annually. Moreover, an Atlanta Fed gauge of “sticky CPI,” measuring prices that don't tend to move a lot, was only slightly lower at 6.5% in Apr. Flexible-price CPI, which measures more volatile items such as food & energy costs, rose to 1.9%, an increase of 0.3 percentage point.

Traders raise the chances for a Fed rate cut following April inflation report

Mortgage rates fell slightly last week after the chair of the Federal Reserve suggested a potential end to a historic string of interest rate hikes. The drop wasn't substantial, but it was enough to boost demand from current homeowners hoping to refinance their mortgages to lower rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) decreased last week to 6.48% from 6.50% in the previous week, with points declining to 0.61 from 0.63 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association’s weekly survey. The rate was 5.53% for the same week one year ago. Mortgage rates for all surveyed loan types decreased over the week. As a result, applications to refinance a home loan jumped 10% last week, compared with the previous week, seasonally adjusted. Refinance demand, however, was still 44% lower year over year. “Mortgage applications responded positively to a drop in rates last week, as the Fed signaled a potential pause at the current level for the federal funds rate in anticipation of inflation slowing and tightening financial conditions that will slow economic and job growth,” wrote Joel Kan, MBA's deputy chief economist. Applications for a mortgage to purchase a home increased 5% for the week, but were 32% lower than the same week a year ago. Rates haven’t really dropped enough to offset high home prices. Prices have been cooling since last summer, but are already reheating this spring due to strong demand & very low supply. Mortgage rates rose sharply to start this week, according to a separate survey from Mortgage News Daily. The increase was due to investor sentiment that the regional banking crisis may be easing.

Mortgage demand surged after Fed signaled potential pause in rate hikes

Airfare to Europe & Asia this summer surged to its highest level in more than 5 years, according to recent data from travel app Hopper. Trips to these highly sought-after destinations increased by more than $300 per ticket compared with last summer as surging demand, higher jet fuel prices & lower capacity continue to pump up intl airfare prices, according to lead economist of travel app Hopper Hayley Berg. Prices to Europe are already averaging $1167 per round-trip ticket this summer, up 36% compared with last summer & up 37% compared to pre-pandemic times. Meanwhile, prices to fly to Asia, are averaging $1817 per ticket, up 24% compared with last summer & up 62% compared to pre-pandemic levels. Berg said demand for intl trips continues to outpace summer 2022 due in part because of travel restrictions. "Last summer demand was primarily focused on domestic trips, as travel restrictions and testing requirements limited access to some countries, while tourism to others remained completely closed," Berg said. On the other hand, travelers will see some relief when flying domestically. Higher available capacity & relief on jet fuel prices pushed domestic fares down nearly 20% compared with last summer. Domestic airfare, which is averaging $306 per round-trip ticket, is up only 6% from summer 2019. Domestic prices will peak this summer around the Fourth of July, with trips averaging $349 per ticket, up 17% from 2019. However, that's down from the peak of
$420 per ticket last summer.

Airfare from US to international destinations surges to highest level in 5 years

Gold futures finished lower, giving back more than ½ of what prices gained in the previous session. The US Apr consumer price index data were mixed in nature, so gold saw a selloff after an initial jump in prices. There is no confirmation of the next interest rate move by the Federal Reserve. Gold for Jun settled at $2037 an ounce, down $5 for the session.

Gold Futures End Lower as U.S. Inflation Data Provides Little Indication of The Fed's Path for Interest Rates

Oil prices were down more than 1% after data showed a surprise weekly build in US crude stockpiles & the gov remained mum about refilling the national reserve contrary to media reports a day ago. The US crude inventory balance rose by 2.9M barrels last week, versus a previous drawdown of 1.3M for the previous week. West Texas Intermediate (WTI) crude settled down $1.15 (1.6%) at $72.56 per barrel, after non-stop gains in 3 previous sessions.