Markets slump on fears of infllation and further Fed rate hikes

Dow sank 198, decliners over advancers better than 3-2 & NAZ retreated 148.  The MLP index fell 4+ to the 238s & the REIT index slid fractionally below 362.  Junk bond funds remained weak & Treasuries continued with more selling, bringing higher yields.  Oil rose 1 to the 87s (another recent high) & gold was off 10 to 1942 (more on both below).

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A key measure of home-purchase applications tumbled last week to a nearly 3-decade low as consumer demand cooled sharply amid a recent surge in mortgage rates.  The Mortgage Bankers Association's index of mortgage applications fell 2.9% last week to the lowest level since 1996, according to new data.  "Mortgage applications declined to the lowest level since 1996, despite a drop in mortgage rates," said Joel Kan, MBA's deputy chief economist.  "Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates."  The data also showed that the average rate on the popular 30-year loan slid to 7.21% from 7.31% the previous week.  While that marks a slight improvement, mortgage rates remain about a full percentage point higher than just one year ago.  The steep rates continued to weigh heavily on housing demand, with applications for a mortgage to purchase a home tumbling 2% for the week.  Application volume is down 28% compared with the same time last year.  Demand for refinancing also continued to fall last week, sliding another 5%, according to the survey.  Compared with the same time last year, refinance applications are down 30%.  A recent report from Realtor.com shows that the total number of homes for sale, including homes that were under contract but not yet sold, tumbled by 9.2% in Aug compared with the same time a year ago.  Available home supply remains down a stunning 45% from the typical number before the COVID-19 pandemic began in early 2020.  "Inventory remains persistently low, even with record-high mortgage rates putting a damper on demand," said Danielle Hale, chief economist at Realtor.com.  "The inventory crunch continues to put upward pressure on home prices, amplifying affordability concerns and shutting some potential buyers out of the market."

Mortgage demand tumbles again as high rates crush the housing market

The US federal deficit is projected to nearly double this year as a result of higher interest rates & lower tax revenue.  The gap between what the gov spends & what it collects is expected to grow from about $1T last year to $2T for the 2023 fiscal year that ends Sep 30, according to the latest projections from the Committee for a Responsible Federal Budget (CRFB), a nonpartisan group that advocates for reducing the federal deficit.  "This would be the highest deficit we’ve ever had outside of a recession or national emergency," Marc Goldwein, a senior policy director at CRFB, said.  The sizable increase stems from a number of factors, including high inflation, more expensive interest payments & a drop in tax receipts.  It comes on the heels of a record drop in the budget shortfall last year, as the deficit dropped from close to $3T to roughly $1T after the gov's record spending during the COVID-19 pandemic in 2020 & 2021.  In 2022, the gov enjoyed a surge in capital gains revenue after Americans capitalized on the booming market the previous year, sold more stock & recorded large gains.  The market has not fared as well since then, leading to a sharp drop in capital gains tax revenue compared with last year.  The Treasury Dept likewise benefited from a spike in general tax collection, because surging inflation essentially pushed up nominal income for Ms of households.  Although the IRS indexes the tax code to inflation, it does so on a lag.  Higher federal income tax brackets & standard deductions took effect at the beginning of 2023, essentially allowing more Americans to shield their income from the IRS.  Social Security & Medicare are also indexed to inflation, meaning the gov is spending more money on those programs than it did in fiscal year 2022.  "But mostly what’s happening is it’s coming to the new normal, from an unusually low 2022 deficit," Goldwein said.  "That’s pretty scary, because normal before the pandemic was $1 trillion. And in 2015, it was $500 billion. So we went from $500 billion is the normal, to $1 trillion is the normal, to $2 trillion is the normal in less than a decade."  The figures exclude Pres Biden's $400B student loan cancellation plan, which was counted in the official 2022 deficit numbers but never implemented because the Supreme Court struck the policy down.  Such massive spending imbalances highlight the toll that high & rising debt can take on everyday Americans.  High deficits can fuel inflation & high debt can push up interest rates.  "Mortgage rates are as high as they’ve been since well before the financial crisis," Goldwein added.  "Car loan rates, student loan rates, credit card rates, they’re all really high."  The deficit surge comes as lawmakers rush to avert a gov shutdown.  The White House has urged Congress to pass a short-term funding measure, known as a continuing resolution, in order to keep the gov solvent while lawmakers continue negotiations over longer-term funding bills.

US federal budget deficit projected to double this year

Moderna's (MRNA) new Covid vaccine produced a strong immune response against BA.2.86, a highly mutated omicron variant that health officials are watching closely, according to clinical trial data.  The updated shot produced an 8.7-fold increase in protective antibodies against BA.2.86, which has been detected in small numbers nationwide.  The Centers for Disease Control & Prevention previously said the strain, also known as “Pirola,” may be more capable of escaping antibodies from earlier infections and vaccinations, but new research also suggests that the variant may be less immune-evasive than feared.  MRNA is the first company producing updated Covid jabs to release data on how its shot fares against BA.2.86.  Its trial results suggest that the company's jab will still be effective against newer variants of the virus as XBB.1.5 declines nationwide.  Last month, MRNA also released clinical trial data suggesting that its new shot provides protection against the now-dominant EG.5, or “Eris,” variant & another rapidly spreading strain called FL.1.5.1.  Last week, the CDC indicated BA.2.86 has been found in 4 states, but it's still so rare that it's not listed as a standalone strain on the CDC's variant tracker.  The stock fell 1.12.
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Moderna says updated Covid vaccine was effective against BA.2.86 in trial

Gold futures settled lower for a 2nd straight session, with prices for the most-active contract settling at their lowest since Aug 25.  Gold found itself under renewed selling pressure after stronger than expected US economic data boosted expectations around US rates staying higher for longer.  The precious metal remains under the mercy of an appreciating $ & rising Treasury yields.  Dec gold declined by $8 (0.4%) to settle at $1944 an ounce.

Gold futures post back-to-back losses

US crude futures post their 9th straight session of price increases, ending up 1% at $87.54 a barrel, which is the highest closing price since Nov 2022.  Analysts attribute the gains to announced production cuts by Saudi Arabia & Russia, & say a late-summer rebound in US air travel volumes has also motivated buyers.  A survey forecasts a 2.1-M-barrel weekly decline in US crude stockpiles.  The 9 straight sessions of price increases marks WTI's longest winning streak since 2019.  Brent crude also ends at a 10-month-high above $90.

WTI Oil Ends Higher For 9th Straight Session

Worries about rising oil prices & interest rates around recent highs overhang the stock market.  In addition, the discussion about higher deficits only make matters worse (see above).  The outlook for stocks is very troubling after Dow has lost its fans about a month ago.

Dow Jones Industrials