Daily Commentary
Commentary prepared by Alloya Investment Services, a division of the wholly owned CUSO of Alloya Corporate Federal Credit Union. Alloya Investment Services is a leading broker/dealer consultant to credit unions.
Friday, April 19, 2024 at 8:00 am CT
Commentary prepared by Tom Slefinger, SVP, Director of Institutional Fixed Income Sales, Registered Representative of ISI*, Alloya Investment Services
Market Indications
Other Market Indicators
| Market Indicators | ||
|---|---|---|
| 2s/5s Tsy Spread | -0.32 | -0.01 |
| 2s/10s Tsy Spread | -0.37 | -0.02 |
| 2s/30s Tsy Spread | -0.27 | -0.02 |
| DJIA-30 | 37,775.38 | +22.07 |
| S&P-500 | 5,011.12 | -11.09 |
| NASDAQ | 15,601.50 | -81.87 |
| Dollar Idx | 106.12 | -0.02 |
| CRB Idx | 295.60 | +1.16 |
| Gold | 2,378.30 | -0.60 |
Daily Commentary
Recap – The S&P 500 declined again with a losing streak in the S&P now at five sessions in a row, the longest since October 2023. If the index closed down today it would be the longest since October 2022.
The Fed is hitting hard from all corners. Yesterday, Fed President Neel Kashkari (Minneapolis) following Loretta Mester (Cleveland) intimated that the markets now see no rate cuts coming this year. Note: John Williams from the New York Fed actually floated the trial balloon of renewing the rate-hike program! The 2-year Treasury note yield at 5% already reflects this.
Punch bowl, sayonara. This is about the Fed reducing the wealth effect and removing the froth away from the inflation in assets (equities and housing). The latter is now feeling the pain from rates on 30-year mortgages crossing above 7% for the first time this year. The impact is not just limited to homebuilding activity. See the Wall Street Journal (WSJ) article, “This Could Be the Year the Home-Improvement Boom Fizzles Out. Here's Why”.
Source: Bloomberg
U.S. existing home sales declined -4.3% month-over-month in March to 4.19 million units at an annual rate — just about as expected. Sales are now at the very low end of the range of the past two decades. With rates on the 30-year fixed mortgage piercing 7%, the high price landscape is causing further erosion in homeowner affordability. There really is nothing much positive to say about the residential real estate market. Yes, the demographics are supportive, but you need to be able to afford a home before you can buy one (unless Ma and Pa dig into their pockets).
Source: Bloomberg
A relic? The Leading Economic Index (LEI) used to be a closely watched barometer of future growth, but it has been laughed off as a relic. In March, the LEI fell a hard -0.3% month-over-month and to the lowest level since May 2020. But nobody seemed too fussed about it. Meanwhile, the year-over-year trend, at -5.5%, is at a level that has triggered a recession 100% of the time in the past. Will be different this time? Some cause for pause here.
Inflation, inflation, inflation. That is on the brain of every Federal Open Market Committee (FOMC) official. Never mind that whatever inflation is left in the system has come down to just auto insurance, health care premiums and the arcane way the Bureau of Labor Statistics (BLS) treats the dominant rental components in the index. Wide swaths of the Consumer Price Index (CPI) are either disinflating or deflating.
Moreover, the message from the recent Beige Book was adamant that inflationary pressures have abated, but the Fed is choosing to ignore this 50-year-old report that is chock-full of up-to-date information on the economy from business contacts, not government statisticians. To wit:
“Several reports mentioned weakness in discretionary spending, as consumers' price sensitivity remained elevated. Another frequent comment was that firms' ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins.”
My money is with the Beige Book, and not the BLS, since the information contained in the report comes from those companies that influence the economy.
Moving on. Consumer credit quality is clearly eroding. That this is happening at a time of a sub-4% unemployment rate is rather shocking but is a testament to how financially stressed the household sector is. Again, not on average but at the margin. Take Discover Financial as an example. It reported earnings and their net charge-offs rose across the board.
“The total net charge-off rate of 4.92% was 220 basis points higher vs the prior year period reflecting continued seasoning of recent vintages with higher delinquency trends. The credit card net charge-off rate was 5.66%, up 256 basis points from the prior year and up 98 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 3.83%, up 107 basis points year-over-year and down 4 basis points from the prior quarter. The student loan net charge-off rate was 1.58%, up 54 basis points from the prior year and up 6 basis points from the prior quarter. Personal loans net charge-off rate of 4.02% was up 208 basis points from the prior year and up 63 basis points from the prior quarter.”
In addition, its provision for credit losses came in at $1.5 billion, increasing by $395 million from the prior year’s quarter ($1.1 billion a year ago) and bringing the total to $6.4 billion over the past year.
In overnight trade, there were initial jitters as oil spiked with Israel responding to last Saturday’s missile attack launched by Iran. At one point overnight, the 10-year Treasury yield was down as much as -14 basis points on the safety trade (now down -5 basis points to 4.59%), and Dow futures were off more than -500 points (now down -160 points). The oil price, to little surprise, spiked above and then reversed once it became apparent that the Israel Defense Forces (IDF) strike was a symbolic message being sent to Tehran. All that said, it cannot be denied that the conflict in the Middle East has reached a new and potentially destabilizing chapter.
Have a great weekend!
Economic Calendar
April 15 - 19, 2024: The Week Ahead
Future Fed Expectations
Source: Bloomberg
| Select Probabilities based on the Futures | |
|---|---|
| Probability of Fed Funds rate CUT on May 1. 2024 | -3% |
| Probability of Fed Funds rate CUT on June 12, 2024 | -19% |
**All quoted rates are indications and are subject to change without notice.
* ISI is a member of the FINRA/SIPC.
The information contained herein is prepared by ISI Registered Representatives for general circulation and is distributed for general information only. This information does not consider the specific investment objectives, financial situations or particular needs of any specific individual or organization that may receive this report. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities. All opinions, prices, and yields contained herein are subject to change without notice. Investors should understand that statements regarding future prospects might not be realized. Please contact Alloya Investment Services to discuss your specific situation and objectives.