Market Commentary: Square Peg in a Jackson Hole

by Gayl Mileszko

Square Peg in a Jackson Hole

If only the brain trust assembling this week at the St. Louis Fed’s annual economic summit in Wyoming could come up with quick and easy solutions to the fiscal and monetary woes that vex the world. It seems that the brightest minds have gotten us into some tight spots. In every corner of the globe we find crushing debt, volatile currency valuations, confusing cryptocurrencies and central bank digital currencies circulating, trade embargoes, aggressive central bank interventions, bloated central bank balance sheets, inflation, disinflation, labor force participation rates at multi-decade lows or record high youth unemployment. There are bubbles and bigger bubbles and bankruptcies. Then there are the shiny new artificial intelligence developments that bring both hope and hysteria. The gathering of thinkers at the Jackson Hole Lodge in Grand Teton National Park will focus on “structural shifts in the global economy” and the world breathlessly awaits its findings and hopes for shifts in a better direction.

Square Root of Higher

Our erudite central bankers and their advisors, the ones that have dominated the American way since the Great Recession, do not meet again to decide on the next month of policy until September 19. We live from month to month awaiting their rate announcements that have such a great impact on everything from mortgages to credit cards and auto loans.  These leaders are not far from our thoughts every day as we battle inflationary prices on the most essential goods and services and try to demystify the gyrating markets.  Ahead of that next meeting, futures traders focused on the direction of U.S. interest rates see an 85% chance that the Open Market Policy Committee will hold rates in the target range of 5.25% to 5.50%. Those trading out longer currently predict that rates will stay put right there until small cuts begin in May of 2024. But there are a growing number of investors who take a look at stubbornly high American consumer spending and sentiment, and solid retail sales and foresee the Fed about to club us in the head again with another increase.

Squarely Off

Bonds are behaving like market misfits, askew with inverted yield curves and rates that have done nothing but rise all month. Stocks have watched these upward moves with dismay. The VIX index of volatility has risen 30% this month. The Dow at 34,500 has lost 2.7%, the S&P 500 at 4,369 is down 4.6%, and the Nasdaq at 13,290 has lost 7.2%. Equity mutual funds had $4 billion of withdrawals last week, the 80th consecutive week of outflows. On the commodity side, even gold at $1,889 an ounce is down 3.6%, and silver prices at $22.75 an ounce have dropped 6.5%. Bitcoin at 25,887 is down 11.8%. Only oil at $81.25 a barrel is up slightly, not quite than 1% in August.  In bond world, the peak yield is the 6-month T-bill at 5.46%. The 2-year yield has risen 7 basis points to 4.94%, the 10-year at 4.25% is up 30 basis points and the 30-year at 4.37% has increased 36 basis points.  Alongside the selloff, the 10-year BAA corporate bond index yield at 6.56% has dropped 28 basis points. Taxable bond funds and exchange traded funds together lost $2.2 billion of assets in customer withdrawals last week.

Center Square on Municipal Bonds

On the tax-exempt side, SIFMA 7-day rate (Municipal Swap Index) rose to 3.30% last Wednesday. As with their government counterparts, the short end of the municipal bond yield curves has been inverted since last December 9. At the close on Friday, the 1-year AAA general obligation benchmark at 3.25% yields as much as the 14-year maturity.  The 10-year muni yield at 2.84% has risen 27 basis points this month. Only 57 basis points separate the 1-year from the 30-year yield at 3.82%.  Mutual bond funds and exchange traded funds saw about $264 million of combined outflows last week.  One charter school came to market: American Leadership Academy. They sold $141.5 million of non-rated bonds through the Sierra Vista Industrial Development Authority in Arizona. The transaction was structured with a final maturity in 2058 that priced with a coupon of 5.75% to yield 6.00%. Only four senior living issues have sold this month, and none since August 9.

Square Deals

This week’s markets are fairly quiet ahead of the Jackson Hole speech by Chair Jay Powell on Friday morning.  Municipal issuance may total $7 billion, but sales of new investment grade corporate bonds are only expected to total $5 billion. No high yield corporate sales have been announced. Activity will be driven in part by economic data releases on existing home sales, new home sales, durable goods, and consumer sentiment. Much attention is being paid to corporate earnings results and profit outlooks from management at Nvidia as well as major retailers including Macy’s, Lowe’s, and Dick’s Sporting Goods. Investors will follow the outcome of the first presidential debates of the year coming from the Republican side on Wednesday. But, up until Friday, the most focus will be on the outcome of the 9 U.S. Treasury auctions being held. The flood of bills, floating rate notes, bonds and TIPS has been referred to as an “issuance freight train” that will continue through year end. Among major buyers of shorter maturities are the money market funds. Their total combined assets under management are pegged at a record $5.56 trillion and yields are extremely attractive. The annualized 7-day current yield of the Crane 100 Money Fund Index stands at 5.15%

Square Away Your Portfolio

The summer winds down and many are enjoying these final weeks on vacation. For those with students already back to school, we wish them all great success and encourage you to make their financial education a key focus this year. Of course, we at HJ Sims are here to help advise you on financing options, square up your portfolio, peg new income-generating opportunities, and swap out of positions that no longer fit. Reach out and contact your HJ Sims representative this week with your thoughts and questions.