Dow went up 65, decliners a little higher than advancers & NAZ gained 49. The MLP index slid back fractionally to under 241 & the REIT index fell 1 to the 361s. Junk bond funds crawled higher & Treasuries had modest selling, bringing higher yields. Oil is now above 89 & gold was flattish at 1935.
AMJ (Alerian MLP Index tracking fund)
Inflation accelerated for a 2nd straight month in Aug, reversing previous declines as consumers continued to grapple with the rising cost of everyday goods. The Labor Dept said that the consumer price index, a broad measure of the price for everyday goods including gasoline, groceries & rents, rose 0.6% in Aug from the previous month, in line with estimates. It marked the steepest monthly increase this year, underscoring the challenge in taming high inflation. Prices climbed 3.7% from the same time last year, faster than both the 3.2% reading in Jul & the 3.6% estimate economists. Other parts of the report also pointed to a slower retreat for inflation. Core prices, which exclude the more volatile measurements of food & energy, climbed 03% & 4.3% annually. While both of those figures are lower than previous readings, the monthly core measure climbed faster than expected. Core prices remain more than 2 times higher than the typical pre-pandemic level. Scorching-hot inflation has created severe financial pressures for most US households, which are forced to pay more for everyday necessities like food & rent. The burden is disproportionately borne by low-income Americans, whose already-stretched paychecks are heavily affected by price fluctuations. The inflation increase hit Ms of workers' paychecks last month. Average hourly earnings for all employees declined 0.5% in Aug from the previous month when factoring in the impact of rising consumer prices. On an annual basis, average hourly earnings remained up 0.5% from the same time last year. The spike in headline inflation largely stemmed from a surge in gas prices, which accounted for more than ½ of the increase last month, the Labor Dept said. In total, energy prices climbed 5.6% in Aug from the previous month, including a 10.6% jump in gas prices. Oil prices have surged in recent months as OPEC+, the group of oil-producing nations led by Saudi Arabia & Russia, has cut back on crude production.
Consumers hit as gas prices spark biggest inflation jump in six months
The era of easy money is finally coming to an end, & the US economy faces a "reckoning" as businesses grapple with rising loan costs, according to a new survey from RSM. The findings indicate that rising interest rates pushed up the cost of commercial & industrial loans, making it more difficult for middle-market firms to meet payrolls & finance any expansion. 77% of senior execs at firms expect interest rates to increase in the coming months. A stunning 82% of respondents in the RSM Middle Market Business Index survey said that rising rates carried a negative risk to their operations. "The result is a risk to economic growth across the real economy and, potentially, a recession," said RSM chief economist Joe Brusuelas from a post about the survey. The astronomical rise in rates is hitting smaller businesses the hardest. Small & mid-sized firms already pay 10.9-15.5% for financing, the survey found, far higher than in the past 2 decades. Those rates are raising the risk premium on lending close to double-digits, a "dynamic that was hard to imagine even two years ago." For many firms, higher rates have yet to take effect. About 1/3 of smaller middle-market firms have loans paying below 5%, while about 24% have loans with 5-7%. Those loans will ultimately need to be rolled over at higher rates, further threatening cash flow. Brusuelas pointed to recent research that indicates after a tightening shock of 100 basis points, research & development spending declines of 1-3%, while venture capital spending plummets by about 25% in the following 1-3 years. Federal Reserve policymakers have raised interest rates sharply over the past year, approving 11 rate hikes in hopes of crushing inflation. In the span of just one year, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s. Officials have signaled that additional rate hikes are on the table this year until there is more substantial evidence that high inflation has retreated for good. The Fed next meets Sep 19-20 is & widely expected to hold rates steady at the current 22-year high. Given the rapid rise in interest rates, the impact on lending conditions across the economy is "nontrivial." Manufacturing, housing, technology, life sciences firms & private equity will face "significant adjustment" periods during the new age of high interest rates.
The US economy faces a new threat: Rising loan costs
Total consumer credit increased at an annual rate of 2.5% in Jul to reach $4.98T, according to the latest data by the Federal Reserve. Revolving credit including credit cards increased at an annual rate of 9.2%. Nonrevolving credit such as personal loans increased at an annual rate of 0.2%. "Revolving credit growth remains high despite the modest drop," Curt Long, the NAFCU's VP of research & chief economist, said. "This is prompting fears that stresses may arise at the household level due to greater borrowing in a higher interest rate environment." However, there remains a significant disparity across interest rates when it comes to credit cards & personal loans. The average credit card interest rate as of Q2 of 2023 was 20.7%, according to the Fed report. That represented an increase from 15.1% in the Q2-2022. Meanwhile, the average personal loan interest rate is 11.5%, according to the most recent data by the Federal Reserve Bank of St Louis. Still, consumers have been turning to credit cards amid high inflation. In fact, Americans depend on credit cards more than ever. 2 in 5 American credit card holders said they have never been more reliant on their credit cards than now, according to a survey by Quicken. And 38% said they’d likely need their credit cards to cover expenses they weren't using these for. Even though many Americans are resorting to credit cards to make ends meet amid the heightened cost of basic goods, many believe they'll struggle to pay off the added debt. 35% of Americans said they will likely max out at least one card before the end of 2023. "Our research shows an economic divide that is widening among Americans – there is a large group of hard-working people who are still struggling financially," Quicken CEO Eric Dunn said. "I’m troubled by the compounding problems facing this group – many of them are living paycheck to paycheck and relying on credit cards they may not be able to afford."
Consumer credit increased by nearly $5 trillion
Higher mortgage rates continue to take their toll on mortgage demand, especially for refinancing. Total mortgage application volume dropped 0.8% last week compared to the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) increased to 7.27% from 7.21%, with points increasing to 0.72 from 0.69, including the origination fee, for loans with a 20% down payment. Demand for refinances dropped 5% for the week & was 31% lower than the same week one year ago. The refinance share of mortgage activity decreased to 29.1% of total applications from 30.0% the previous week. As a comparison, at this time of year in 2020, when pandemic monetary policy had interest rates around 3%, the refinance share of mortgage applications was 63%. Applications for mortgages to purchase a home rose 1% week to week but were 27% lower than the same week one year ago. The adjustable-rate mortgage share of total applications rose, signaling that potential buyers are using all the tools they can to lower their monthly payments. ARMs offer lower interest rates but are deemed riskier because their rates are fixed for a shorter term. “Mortgage applications decreased for the seventh time in eight weeks, reaching the lowest level since 1996,” said Joel Kan, a Mortgage Bankers Association economist. “Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate.” Mortgage rates remained high to start this week, according to a separate survey from Mortgage News Daily.
Mortgage demand stalls at a level not seen since 1996Even though inflation has shown improvement over the last year, it continues to be at troubling levels. The future for interest rate hikes remains cloudy.
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