Wednesday, September 6, 2023

Markets retreat on worries about inflation and high interest rates

Dow dropped 180, decliners over advancers 3-2 & NAZ lost 153.  The MLP index declined 3+ to the 238s & the REIT index was off 1+ to the 361s.  Junk bond funds drifted lower & Treasuries saw a little more selling, driving yields higher.  Oil slid back in the 86s following recent strength & gold pulled back 9 to 1942.

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Boston Federal Reserve Pres Susan Collins advocated a patient approach to policymaking while saying she needs more evidence to convince her that inflation has been tamed.  In remarks that aligned with sentiment from other key central bankers, Collins said the Fed may be “near or even at the peak” for interest rates.  However, she noted that more increases could be needed depending on how the data shakes out from here.  “Overall, we are well positioned to proceed cautiously in this uncertain economic environment, recognizing the risks while remaining resolute and data-dependent, with the flexibility to adjust as conditions warrant,” Collins said.  Those sentiments mesh with recent statements from Fed Chair Jerome Powell & Governor Christopher Waller.  Both also supported the patient approach while cautioning that they view recent positive developments on inflation with caution & are ready to approve additional rate hikes if needed.  Collins also noted some good news on inflation, as the Fed's preferred gauge rose just 0.2% in Jul while wage growth also seems to have slowed.  However, she cautioned that “it is difficult to extract the signal from the noise in the data.”  If the improvement is fleeting, “further tightening could be warranted,” she said.  “There are promising developments, but given the continued strength in demand, my view is that it is just too early to take the recent improvements as evidence that inflation is on a sustained path back to 2%,” added Collins, who is a nonvoting member this year on the rate-setting Federal Open Market Committee.  Collins also spoke on the lags with which Fed policy is thought to work.  Generally, economists believe it takes a year to a year & a ½ for rate hikes to seep through the economy.  However, Collins said that Covid-related factors & the general strength of household & corp balance sheets could lengthen those lags, calling for more caution on policy.  “The goal is an orderly slowdown that better aligns demand with supply, which is essential to ensure that inflation is on a sustainable trajectory back to target,” she continued.

Fed’s Collins says policymakers can ‘proceed cautiously’ on future rate hikes 

After rising sharply for several weeks, mortgage interest rates pulled back slightly last week, but not enough to revive mortgage demand.  Total mortgage application volume fell 2.9% last week, compared with 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) decreased to 7.21% from 7.31%, with points falling to 0.69 from 0.73 (including the origination fee) for loans with a 20% down payment.  “Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates,” said Joel Kan, an MBA economist.  “Rates remained more than a full percentage point higher than a year ago, despite mixed data on the health of the economy and signs of a cooling job market.”  Applications to refinance a home loan, which are most sensitive to weekly interest rate changes, fell 5%, compared with the previous week, & were 30% lower than the same week one year ago.  The vast majority of borrowers today have loans with rates below 4%.  Even with high rates of home equity, borrowers are more likely to take out a 2nd loan to pull cash out, rather than lose their low rate thru a cash-out refinance.  Applications for a mortgage to purchase a home fell 2% for the week & were 28% lower than the same week one year ago.  “Prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates,” Kan added.

Mortgage demand drops to 27-year low as interest rates pull back

The CEO of US chip giant Qualcomm (QCOM) thinks artificial intelligence could give the smartphone market a fresh lease on life.  CEO Cristiano Amon said he sees significant opportunity in AI ahead & that the company's upcoming Snapdragon Summit in Oct could lead to major developments in mobile technology.  “The [Snapdragon] Summit is going to be around incredible use cases that we’re seeing from our OEMs [original equipment manufacturers] and phones and ... could create a new upgrade cycle for phones.”  “We we don’t know the timing, but it’s definitely happening,” Amon added.  Smartphone sales have depreciated this year as consumers have gotten a lot more cost-conscious.  Many are opting not to upgrade their devices, as they see little difference in the phones of today versus older models in the market with already sophisticated cameras & processors.  In 2022, global smartphone sales tumbled 11.3% year-over-year to 1.2B, the lowest level since 2013, according to data from market research firm IDC.  Amon said QCOM is taking a different path to its arch semiconductor rival Nvidia (NVDA) in the AI space, one that involves bringing AI to smartphones & other devices rather than data centers, an area that NVDA's more focused on.  “We’re in a slightly different segment ... I think we see an opportunity,” Amon said.  “I think that’s going to get reflected once that opportunity materializes. You have not yet materialized it.”  “But it’s important for you to see the activity. You’ve heard a lot about Gen AI. And you see right now with ChhatGPT and those things [and] what’s happening to data center — we’re doing something different. We’re actually bringing AI to the device.”  The stock fell 1.59.
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Qualcomm CEO says AI may breathe new life into smartphones: ‘It could create a new upgrade cycle’

Lingering concerns about inflation have spurred doubts the Federal Reserve will decide to cut interest rates any time soon.  Additionally, high interest rates are proving to be a  major drag on the economy.

Dow Jones Industrials

 






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