Dow fell 95, decliners over advancers better than 3-1 & NAZ inched up 1. The MLP index stayed near 259 & the REIT index was off 1+ to 390. Junk bond funds hardly budged & Treasuries were sold, driving yields higher (more below). Oil slipped back to the high 91s & gold was off 8 to 2043.
AMJ (Alerian MLP Index tracking fund)
Around 3 qtrs of the effects of tighter monetary policy have already fed thru to the US economy, according to the Intl Monetary Fund (IMF). “We have to recognize that there has been a lot of resilience in the economy despite the rate hikes that we have seen ... our estimate is that for the U.S. about three quarters, or 75%, of the transmission has already gone through, and the rest will go through this year,” the IMF's Deputy Managing Director Gita Gopinath said at the World Economic Forum. There is more transmission still to feed thru in the euro area, where interest rate hikes started later, she added. The US economy has maintained stronger growth than was widely expected since interest rates began rising in Mar 2022, though several strategists have spoken of a potential recession this year. The euro zone economy, meanwhile, has fallen into stagnation. The ECB began hiking in Jul 2022. “What is universally true is we have households and corporations with stronger balance sheets. And we’ve seen effects, but we’ve also seen resilience,” Gopinath continued. “Labor markets are slowing but at a much more gradual pace. Which is why I think at the IMF we feel that a soft landing scenario, the probabilities have come up quite a bit, because inflation has come down without needing that much of a loss in terms of economic activity.” François Villeroy de Galhau, governor of France's central bank, noted on the same panel that there were 2 lags in transmission: from monetary policy decisions to financial conditions & from financial conditions to the real economy. “About the first lag, I think the transmission is more or less over,” he said. “In Europe, what is key is the transmission through banks, because as you know, the bank credit channel is about two thirds or three quarters in Europe, much more than in the U.S.” “What is more difficult is the second lag ... here it’s much more difficult to assess, and it strongly depends on various sectors. If I take real estate for instance, I think most of the transmission has happened already because it’s very sensitive to interest rates. For other sectors, we will see,” de Galhau added.
U.S. economy has already seen 75% of the impact from Fed’s hikes, IMF says
Treasury yields rose to kick off a shortened trading week with investors looking ahead to fresh economic data. The yield on the 10-year Treasury note ticked higher by 6 basis points to 4.011%. It had been hovering around the 4% mark for much of last week. The 2-year Treasury yield rose by more than 5 basis points to trade at 4.192%. Yields & prices move in opposite directions & 1 basis point equals 0.01%. Those moves come after central bank officials in Europe talked down rate cut expectations. “It’s too early to declare victory … the job is not yet done. That said, interest rate tightening has been quite successful so far, more successful than we thought even at Davos one year ago,” ECB member Francois Villeroy de Galhau said in Davos, Switzerland. Investors are looking ahead to Dec retail sales data out tomorrow, which could fuel recessionary fears & concerns about economic growth if US consumer spending cools. The forecast anticipates an increase of 0.2% for the month, slightly under the 0.3% increase in Nov.
U.S. 10-year Treasury yield climbs above 4% as shortened trading week begins
The number of homes for sale on the market rose for the 2nd straight month in Dec as a severe housing shortage finally begins to ease. A new report from Realtor.com shows that the total number of homes for sale, including homes that were under contract but not yet sold, rose by 4.9% in Dec compared with the same time a year ago. It marked the 2nd month since last Jun that would-be homebuyers were able to see a larger number of unsold homes than compared with the same time last year. "Across the U.S. we’re seeing improvements in inventory levels, especially in the South," said Danielle Hale, Realtor.com chief economist. Inventory in the South surged by 7.7% in Dec when compared with the year-ago period. However, it was a different story elsewhere in the country. Inventory climbed just 0.2% in the Midwest, fell 8% in the Northeast & plunged 14.8% in the West. Despite the uptick in the number of homes for sale last month, inventory remains muted when compared with several years ago. Available home supply is still down a stunning 34.3% from the typical amount before the COVID-19 pandemic began in early 2020. "While the uptick in December inventory levels is encouraging, it is important to note that two-thirds of outstanding mortgages in the U.S. have a rate under 4% and more than 90% have a rate less than 6%," Hale added. "We are optimistic that inventory levels are moving in a positive direction, but the number of homes on the market is still low relative to pre-pandemic levels." The housing shortage began as a result of the astronomical rise in mortgage rates. The Federal Reserve's aggressive interest-rate hike campaign sent mortgage rates soaring above 7% for the first time in nearly 2 decades last year. Sellers who locked in a low mortgage rate before the pandemic began have been reluctant to sell, leaving few options for eager would-be buyers.
The housing shortage is finally starting to ease
Investors are waiting for economic reports this week along with earnings. Earnings from banks last week were rated as lackluster As usual, there will be plenty of hot air coming out of Davos this week.Dow Jones Industrials
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