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Jamie Dimon discusses danger heading toward the economy

Jamie DimonSince 2022, the economy has been treading water, but recent events in March have further exacerbated the country’s woes.

The failures of Silicon Valley Bank and Signature Bank, according to JPMorgan Chase CEO Jamie Dimon, have only heightened the likelihood of a US recession.

Adding to the problems

In his first interview after the SVB collapse, Jamie Dimon stated that, while the banking sector is robust, current financial system problems represent another “weight on the scale” toward recession.

“We are seeing people reduce lending a little bit, cut back a little bit, and pull back a little bit,” Dimon pointed out.

Although the banking troubles will not necessarily cause a recession, he believes they are recessionary.

Dimon stated that the economy is facing storm clouds.

He identified various potentially dangerous hazards to the economy, including:

  • The Federal Reserve’s tightening regimen
  • Higher inflation
  • Russia’s war on Ukraine

However, Jamie Dimon remains optimistic about the United States’ human capital strength.

“I’m a red-blooded, full-throated, free-market, free-enterprise capitalist,” he said regarding supporting local entrepreneurship.

“I think we should applaud free enterprise and we should sing from the hills the benefits while we fix the negatives, as opposed to denigrate the whole thing.”

JPMorgan Chase has inaugurated the Atlanta community branch, the company’s 16th community-based branch.

It also offers free events, financial health courses, and skill training to the community.

Community branches

According to Jamie Dimon, the branches are not a kind of charity, but rather beneficial to business.

“We need to get money into local communities,” he explained.

“A lot of us had moms and dads who took us to open our first accounts. And then you see your money go from like $84.75 to $85.17. It was like magic, that interest.”

JPMorgan Chase CEO Jamie Dimon also stated that he aims to do the same with neighborhood branches.

“We don’t want people to be afraid to walk into a branch here,” he added.

“Come as you are, bring your kids and learn.”

Chase employed numerous community managers as part of the effort in order to encourage people who are uncomfortable in a bank environment to learn about their money.

Dimon stated that the position is critical and is frequently played by regional, mid-sized community banks, which is why the recent collapses of SVB and Signature, as well as the likelihood of further failures, were concerning.

Read also: Bob Lee, Cash App leader, stabbed in San Francisco

Banking crisis

Jamie Dimon is unsure whether the US economy has recovered from the financial crisis.

“I’m hoping it will resolve, you know, rather shortly,” he said.

Dimon is unsure whether additional banks will fail in 2023, but he notes that it is not the same as the 2008 financial crisis.

He observed that hundreds of institutions throughout the world wielded much too much power in 2008.

Dimon also stated that the difficulties at mortgage banks were not too severe, saying:

“This is nothing like that. And the American public shouldn’t think that.”

Regardless, Jamie Dimon believes that certain banks should fail.

“Failure is okay,” he explained. “You just don’t want this domino effect.”

Furthermore, he emphasized that regional banks and Americans should be prepared for higher interest rates to last.

“I don’t know if it’s going to happen, but be prepared for that tide,” said Dimon.

He also mentioned that interest rates might remain high for a longer period of time, and that banks with Treasuries should be prepared for this scenario.

Debt ceiling 

Lawmakers have grown concerned about lifting the debt ceiling, which they set at $31.38 trillion in January.

Various studies predict that the US government will default in the summer or early September if no new legislation is passed.

Negotiations between the White House and House Republicans have also come to a halt.

In 2023, Jamie Dimon collaborated closely with the White House and Congress to address a number of economic issues.

He pledged that no default would occur while he was in charge.

“Not as long as I’m alive,” said Dimon. “Boy, we’re going to keep fighting this one.”

The CEO of JPMorgan Chase expects Congress will negotiate a debt-ceiling compromise in the coming months, but that the economy may face further hardship before reaching an accord.

“You’ll feel the pain before it happens,” he said regarding the breaching of the debt ceiling.

As a potential default approaches, it will be noticed in the markets and will frighten individuals.

“When I go to Washington, most people there know how serious this is, and they want to get it to a resolution,” he added.

First Republic Bank rescued by large banks, $30 billion loaned

First Republic BankThe banking industry has entered a crisis as numerous banks confront diminishing customer and investor trust.

Silicon Valley Bank and Signature collapsed late last week, and Credit Suisse in Europe is also in trouble.

This week, First Republic Bank is grappling with fragile investor and consumer trust.

Unlike other institutions, however, there is still hope for the bank, since it is due to get a lifeline from some of America’s most important banks.

The news

While First Republic Bank faces a credibility crisis, many American central banks are offering it a $30 billion lifeline.

Some of the banks that are assisting include:

  • Bank of America
  • Citigroup
  • JPMorgan Chase
  • Truist
  • Wells Fargo

The Treasury Department issued the following statement on Thursday:

“This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system.”

The help

The $30 billion will provide the ailing San Francisco bank with the funds it requires to satisfy consumer withdrawals.

It also helps the US banking sector in the midst of a widespread lender crisis.

The banks issued the following statement:

“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes.”

“[And] it demonstrates their overall commitment to helping banks serve their customers and communities.”

“Regional, midsize, and small banks are critical to the health and functioning of our financial system.”

“The banking system has strong credit, plenty of liquidity, strong capital, and strong profitability. Recent events did nothing to change this.”

“Together, we are deploying our financial strength and liquidity into the larger system, where it is needed the most,” they continued.

“America’s larger banks stand united with all banks to support our economy and all of those around us.”

Liquidity problems

First Republic Bank’s shares were stopped three times on Thursday due to volatility.

Yet, it ended the day at more than 10%.

The bank’s issues highlighted the ongoing concerns about the banking industry following the failures of Silicon Valley and Signature Bank.

Concerns were raised on Wednesday about depositors’ capacity to withdraw their funds.

As a result, First Republic Bank’s credit rating was reduced by Fitch Ratings and S&P Global Ratings.

First Republic Bank is one of the regional banks having a large number of uninsured deposits in excess of the $250,000 FDIC limit.

While it does not compare to Silicon Valley Bank’s large 94% uninsured deposits, S&P Global reports that First Republic has a sizable 68% of total deposits that are uninsured.

Nonetheless, many clients chose to quit the bank and deposit their funds elsewhere, posing a challenge for First Republic Bank.

As a result, the bank has two options: borrow money or sell assets in order to pay consumers in cash for their deposits.

Banks generate money by lending parts of their customers’ deposits to other customers.

Even so, First Republic Bank has an extraordinary liability-to-deposit ratio of 111%, according to S&P Global.

The ratio implies that the bank lent more money than it had in client deposits, indicating that it is a hazardous investment for investors.

Read also: Credit Suisse takes up Swiss National Bank’s loan offer after 30% shares crash

Private meeting

Treasury Secretary Janet Yellen met privately with JP Morgan CEO Jamie Dimon on Thursday, according to two persons familiar with the matter.

They met before agreeing to put $30 billion in First Republic Bank to keep it solvent.

The meeting was the culmination of two days of meetings between Yellen and other US authorities as well as heads of the country’s top banks.

The two sides worked together to find a solution for the bank’s problems.

Janet Yellen led the government effort, while Dimon urged bank CEOs to support the influx of deposits.

According to a source, Yellen proposed gathering together the top US banks to make direct deposits for First Republic Bank.

The action was crucial in terms of preserving the bank’s deposit base.

That was also an important signal to the financial market about the bank and the American financial system.

Loan system

Following the fall of Silicon Valley Bank, the Federal Reserve established a lending system to avoid regional banks from failing.

The program permits banks to provide the Fed with Treasury bonds as security for one-year loans.

The Fed would then reimburse banks for the value of the Treasuries, which fell in value when the Fed raised interest rates last year.

The federal assistance looks insufficient to keep investors happy.

On Sunday, First Republic Bank unveiled a partnership with JPMorgan to fast access liquidity if needed.

Furthermore, the bank stated that it has $70 billion in idle assets that it will utilize to cover consumer withdrawals if necessary.

Mortgage rates still on 5-week trajectory

Mortgage Despite the new year, the fight against inflation continues due to it being stubbornly unpredictable.

Mortgage rates fell below 7% for the seventh week in a row, although the Federal Reserve said rates may increase higher.

Fixed-rate average

According to Freddie Mac data issued on Thursday, the 30-year fixed-rate mortgage averaged 6.73% in the week ending March 9.

A week ago, the fixed-rate mortgage was at 6.65%.

Last year, the 30-year fixed rate was 3.85%.

It soared around 7.08% in November before declining.

Despite the positive indicators, interest rates started to increase again in February.

In the previous month, the fixed-rate mortgage has climbed by half a percentage point.

The solid economic data indicates that the Federal Reserve still has work to do in combating inflation and will most likely continue to raise the benchmark lending rate.

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” noted Sam Khater, a chief economist from Freddie Mac.

“Overall, consumers are spending in sectors that are not interest rate-sensitive, such as travel and dining out.”

“However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.”

The average mortgage rate is derived by Freddie Mac using mortgage applications received from scores of lenders across the United States.

It is only available to individuals with excellent credit and a 20% down payment.

Rate hikes confirmed to continue

Inflation looked to be reducing as 2023 approached.

So far, strong employment growth and a rising Consumer Price Index revealed that inflation was still present and continuously high.

On Tuesday, Federal Reserve Chairman Jerome Powell testified before Congress, suggesting that the central bank will most likely raise interest rates more aggressively than originally projected.

Jiayi Xu, an economist at Realtor.com, stated:

“While last month Fed officials said that a smaller increase in the federal funds rate would help create a soft landing for the economy, Powell’s testimony on Tuesday made it clear that the central bank is prepared to return to a faster pace of rate increases if the incoming February economic indicators remain strong.”

She feels that the outcome shows that investors were not fully prepared since they are anxious about the Federal Reserve’s upcoming activities.

On March 21-March 22, the Fed will convene another rate-setting meeting, with another half-point rate rise probable.

Read also: Bank stocks investment spikes from recession fears

“Uncertainty about how high rates will go and how long they will remain elevated makes it challenging for investors to make well-informed decisions,” said Xu.

“Therefore, it’s crucial to keep a close eye on the latest developments from the Federal Reserve.”

Although the Fed does not set mortgage interest rates directly, its actions have an influence on them.

Mortgage rates are frequently associated with 10-year US Treasury bond yields.

It reacts to the Fed’s activity, what it really does, and how investors react to it.

Mortgage rates climb when Treasury yields rise, while mortgage rates fall when yields fall.

Housing market

Rising mortgage rates have impacted the spring selling season.

Mortgage applications climbed modestly last week, following three weeks of reductions, according to the Mortgage Bankers Association.

As a result, activity decreased.

Bob Broeksmit, MBA’s president and CEO, stated:

“Even with this jump in activity, both purchase and refinance applications remain well below year-ago levels when rates were much lower.”

“The recent increase in mortgage rates, right at the start of the busy spring buying season, could cause prospective buyers to delay decisions until rates moderate.”

Homebuyer confidence fell to a new low in February, according to a Fannie Mae survey.

Mood dipped after three months of improvement, pushing the indicator closer to its all-time survey low from October.

The greatest substantial drops were associated with employment security and home-selling situations.

“While the current housing market may not look promising for sellers due to factors such as an increasing number of unsold homes, longer time on market, and decelerating price growth driven by high mortgage rates, there are still opportunities to be found,” said Xu.

For example, she said that recent sales numbers show that the percentage of first-time homebuyers is higher than previous year.

“As a result, sellers with starter homes may see robust demand and retain some bargaining power.”

Additionally, Xu remarked that the long-term presence of hybrid working models allows greater options for homeowners when picking where to stay.

Buyers will relocate away from work if they do not commute to work every day, rather than contending for a house in congested, central districts.

“This trend could make homes with easy access to public transportation systems more attractive to home buyers, which, in turn, enhances bargaining power for the sellers,” said Xu.

She also remarked that sellers who are also buyers may benefit from their record-high equity, even if they have to adjust their expectations to lower asking prices.

Jobs see an increase in 2023, says new data

Jobs On Friday, the American job market beat expectations and proved its resiliency once more.

The market growth estimates were astonishingly off by more than three times.

What happened

According to an unified estimate issued last week, the US economy added at least 185,000 jobs in January.

The good news is that the amount would have been higher than the pre-pandemic average.

However, with the economy unpredictable, it led to the creation of almost 500,000 new jobs.

The report

The news that the US gained 517,000 jobs in January awed American economists on Friday morning.

Analysts predicted a small uptick in the unemployment numbers.

It fell from 3.5% to 3.4%.

Furthermore, the economy as a whole is still performing strongly despite notable cutbacks in the media and technology industry.

Other significant changes include:

  • An boost in overall jobs, predominantly in the hospitality and leisure sectors.
  • Following the changes, the US created 4.8 million new employment in 2022—300,000 more than predicted.
  • Earnings increased by 4.4% from a year earlier, which was more than anticipated.

A weakening recession forecast

Since it seemed as though the economy was headed in that direction, everyone in 2022 was worried about recessionary fears the whole year.

The forecasts, according to experts and economists today, were exaggerated.

Mark Zandi, the chief economist of Moody’s Analytics, said:

“Any concern the economy is in recession or close to a recession should be completely dashed by these numbers.”

Read also: Bed Bath & Beyond takes another hit with grim announcement

Many people expressed unease over the Federal Reserve’s attempts to curb inflation by lowering the supply of money.

By preventing company development, regulations often raise the chance of a recession (or, in some circumstances, stopping it altogether).

Despite the rising inflation, the Fed’s actions haven’t caused the labor market to collapse.

“Last year involved the biggest mis-reading [SIC] of the economy in the labor market,” Justin Wolfers, an economist, tweeted on Friday.

“The recession talk spiked to new highs, even as the economy recorded a rate of job growth that any real economist will tell you spelled ‘BOOM.'”

The virus forced economists to differ from the customary, even if in the past they have relied on a variety of models to make their projections.

“My meta-theory of why so many people have been wrong about the economy for so long is that many economists (and econ journos) are incapable of acknowledging that sometimes, good things happen,” said Wolfers.

The Feds and hiking rates

The news will encourage the employees, but Wall Street isn’t as elated.

Due to investors’ shock at the jobs report, which hinted that high interest rates, which lower corporate profitability, are unlikely to decline very soon, stocks fell early on Friday.

The Fed made it apparent that it will keep raising interest rates in an effort to reduce inflation to its target level of approximately 2% and drain the economy of excess liquidity.

Inflation has been falling ever since it hit a peak of 9.1% in the summer of last year.

The Fed’s preferred indicator for estimating price increases from the previous year was the PCE index in December.

The labor market’s strong tolerance for the Fed’s most assertive policy in recent memory shows that the bank is free to maintain high interest rates without causing unemployment and significant job losses.

Despite this, the economy is not entirely secure.

The rising interest rate makes it difficult for people to get loans, which is bad news for anybody trying to finance a company, purchase a home, or take out school loans.

Sung Won Sohn, an economist and finance professor at Loyola Marymount University and the director of SS Economics, issued the statement below on Friday:

“A rolling recession – where various sectors of the economy take turns contracting rather than simultaneously – is in progress.”

Workers market

The most recent job data shows that there are still many open positions.

There were 11 million more job vacancies in December than was anticipated and since July, according to the Job Openings and Labor Turnover Survey (JOLTS), which was published on Wednesday.

Because of the pandemic, office occupancy had been decreasing over the previous three years, but it has just started to rise.

Office occupancy rates have reached 50% for the first time since March 2020 in ten major US cities, according to security-card swap data from Kastle Systems.

The Fed will need to make the hard decisions to help stabilize prices, said Powell

The Fed: The Federal Reserve made an effort to reduce inflation last year after prices reached unprecedented heights in decades.

Their attempts have encountered difficulties nonetheless since political intervention has constrained the Fed’s decision-making power.

The Fed chairman, Jerome Powell, recently gave a speech on the subject.

Remarks

On Tuesday, Jerome Powell reaffirmed the need for the central bank to be separated from political pressure if it is to control excessive inflation properly.

The Fed Chairman warned Sweden’s Riksbank that harsh measures would be required to stabilize prices, even if it results in politically unpalatable criticism.

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” said Powell.

“But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.”

“The absence of direct political control over our decision allows us to take these necessary measures without considering short-term political factors.”

The Fed Chair made remarks during the meeting to discuss central banks’ independence.

A session for questions and answers followed the remarks.

Actions

There were no allusions to the policy’s direction this year in Jerome Powell’s address.

The Federal Reserve increased interest rates seven times in 2022, setting a record-high increase of 4.25 percentage points.

The increases boost the likelihood of additional hikes this year.

Read also: LinkedIn shines a beacon for employees laid off work

Opposition

The decisions made by the Federal Reserve are usually fiercely criticized.

The complaints and criticisms of public officials are nothing new, but Powell’s Fed has come under fire from both political parties.

Under his direction, prices rose, which former president Donald Trump criticized.

Progressive senator Elizabeth Warren and other Democrats have opposed the recent interest rate hikes.

President Joe Biden has stayed silent over the Fed’s actions because he believes the central bank should be in charge of dealing with inflation directly.

Despite the accusations, Jerome Powell claimed that politics had not affected his decision.

Calls for climate change

Powell addressed the lawmakers’ urge to use the Fed’s regulatory authority to combat climate change during his speech on Tuesday.

He received letters from four of the top Republican members of the House Financial Services Committee last year.

The Federal Reserve shouldn’t regulate consumer demand or choose which businesses receive more assistance, according to the Republican argument.

According to Powell, the Fed should keep moving in the same direction rather than veer off course to pursue ostensible societal benefits that are only dubiously related to its legal commitments and purposes.

The Fed’s recommendation that central banks assess their financial readiness for climate-related disasters (such as storms and floods) is the closest to climate-related activity in which these institutions should be engaged in.

“Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public’s will as expressed through elections,” added Powell.

“But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.”

“We are not, and we will not be, a ‘climate policymaker.'”

Climate program

The six largest US banks are included in a “scenario analysis” for the Fed’s pilot program starting this year.

Through the analysis, the adaptability of an institution to large climatic calamities will be determined.

The test will be similar to the ‘stress tests’ that the Fed uses to gauge how banks could react to real economic downturns.

Participating banks in the exercise are as follows:

  • Bank of America
  • Citigroup
  • Goldman Sachs
  • JPMorgan Chase
  • Morgan Stanley
  • Wells Fargo

Independence

Through his remarks, Jerome Powell emphasized central bank independence and insisted that the American people benefited from it.

Powell contends that the independence of central banks allows them to make uncomfortable decisions.

“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” he added.

For the Fed and its employees to be autonomous and use their resources to achieve its goals, Congress established the highest employment and price stability targets.

“Taking on new goals, however worthy, without a clear statutory mandate would undermine the case for our independence,” said Powell.

References:

The Fed is not a ‘climate-policy maker,’ Powell says

Powell says Fed might have to make unpopular decisions to stabilize prices

Prices in the past year: the good and the bad

Prices: Last year, inflation in the US peaked at a decades-high level.

Throughout 2022, the Federal Reserve has been fighting inflation and has employed all available strategies, including raising interest rates.

Price hikes

Price increases have dropped to 7.1%, according to recent Bureau of Labor Statistics data on inflation.

Between November 1 and December 24, retail prices rose 7.6% (inflation unadjusted), making it impossible for people to buy gifts without exceeding their spending limit.

The Mastercard Spending Pulse gave the data, which examines non-auto retail spending.

As food prices rose faster than inflation throughout 2022, the expense of holiday meals surged.

Some products enjoyed astounding double-digit growth, while others showed no change or even a decline.

Electronics

Retailers saw a shift in consumer behavior as soon as the demand for electronics decreased.

Over the year, which ended in November, the prices of major electronics declined.

  • Smartphones plunged 23.4%
  • TV prices dropped 17%
  • Computers rolled back prices by 4.4%
  • Major appliances fell by 1%

Several retailers, like Walmart and Best Buy, stocked up at the start of 2022 in anticipation of supply chain issues and expected increases in customer demand.

However, their goals were thwarted by increasing prices and dwindling customer confidence.

Additionally, when confined in the early phases of the 2020 pandemic, many made substantial expenditures or upgrades.

Read also: Minimum wage set for positive change this year

Apparel & toys

Although gradually, clothing prices increased in 2022.

  • Clothing prices rose by 3.6%
  • Footwear increased by 2.3%
  • Sporting goods climbed 2.7%
  • Toys had a meager 0.6% increase

Despite the minor price rise, the items were still a great deal because inflation outpaced them.

Doug McMillon, the CEO of Walmart, said in December:

“In toys, sporting goods, categories like that, prices have come down more aggressively.”

“We’re still inflated, but we’re not inflated nearly as much as we are in the other categories.”

However, there was a stockpile of extra goods because retailers overestimated customer demand.

To encourage customers to make purchases, stores provided deals to shift inventory.

As a result, retailers were able to regulate prices.

Plane tickets

The 2020 pandemic caused the demand for air travel to fall and reach an all-time low.

But last year, it was restored.

Annually, the expense of travel rose by 36%.

In March, Delta’s president, Glen Hauenstein, called the rise “unprecedented.”

“I have never seen… demand turn on so quickly as it has over Omicron,” said Hauenstein.

A record amount of revenue was made by airlines in April, May, and June as a result of high rates and crowded flights.

Due to travelers, they made a full-force resurgence two years after the pandemic-induced lockdowns.

Gas prices

Travel via land became more expensive.

Gasoline costs rose by 10.1%, but they have dropped from their all-time highs.

The Russian invasion of Ukraine and geopolitical strategies that relied on oil supply contributed to gas price instability.

According to GasBuddy, the national average may reach $4 per gallon prices as early as May.

Another year of severe volatility is not anticipated, according to the fuel price tracking app GasBuddy.

Read also: Tax credit rules for next year not entirely clear

Food prices

In 2022, food prices rose by 10.6%, higher than general inflation.

Through November 2022, various factors contributed to price rises for specific grocery items.

Because of the devastating avian influenza, a scarcity of supplies, and overwhelming demand, egg prices increased by 49.1%.

The Russian invasion of Ukraine caused margarine prices to rise by 47.4%.

In addition, as the world’s milk supply shrank, butter prices have risen by 27%.

Another victim of the Ukrainian scenario is flour.

Due to the disruption of the world grain market and high US transportation costs, the price of flour surged by 24.9%.

Due to crop diseases, lettuce prices in California increased by 19.8%.

Over that time, there was a 12% increase in food prices.

In 2022, as the expense of eating out rose, many patrons opted to accept higher prices as an alternative.

Dining out became more expensive by 8.5% last year due to establishments raising menu pricing to offset growing material costs.

Reference:

What got really expensive this year, and what got cheaper

Mortgage rates to remain the same this week as Fed prepares for rate hike

Mortgage rates: The Federal Reserve is expected to hike rates again this week, but mortgage rates are tipped to stay as they are.

Mortgage rates have seen several ups and downs this year, topping 7% for weeks in October and November.

However, signs of a cooling down of inflation have eased mortgage rates.

According to a study by Bankrate (owned by Red Ventures in addition to NextAdvisor), the average for a 30-year fixed-rate mortgage returned to 6.62%.

Expectations

Partner and managing director of financial advisory firm Lerner Group, JR Gondeck, is bullish on interest rates.

“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over,” said Gondeck.

“We think you’re going to see lower rates into the next year despite further rate hikes.”

Meanwhile, analysts and financial markets are anticipating the US Federal Reserve to raise its benchmark short-term interest rate (the federal funds rate) by 50 basis points this week.

However, experts say the next steps for mortgage rates depend more on the tone of Fed Chairman Jerome Powell’s 2023 forecast.

American Financial Corporation Deputy Chief Economist Odeta Kushi suggested it was just expectations.

“If the market is surprised by the Fed’s projections, we could see some movement in mortgage rates,” said Kushi.

“Whether that surprise is to the upside or the downside.”

The Fed

Housing costs are already a significant part of consumer spending.

The housing market has been a critical indicator in the Fed’s ongoing efforts to curb inflation (7.7% year-over-year in October).

Since early 2022, the Fed raised the federal funds rate from 0 to 3.75% – one of the central bank’s fastest rate hikes.

The efforts were an attempt to curb the ongoing inflation.

Denis Poljak, the co-founder of Poljak Group Wealth Management, provided a unique insight into inflation, saying:

“Inflation is, essentially, too much money chasing, too few foods.”

The Federal Reserve makes it more challenging to borrow money by raising interest rates.

According to the Fed, they will continue to raise interest rates until they see a sustained decline in consumer spending and inflation.

Read also: Meta plans to pull news content out if bill pushes

Housing market

The current inflationary environment did not appear overnight.

It gained momentum from the start of the 2020 pandemic, with the real estate market being a clear example.

The pandemic boom in the housing market led to massive price increases as demand failed to meet supply.

In addition, house price growth continued until it peaked in the middle of the year.

Since then, prices have slowly come down as high mortgage rates have dampened demand.

In addition, the housing market has been in neutral territory lately.

However, declining home prices and stabilizing mortgage rates could put affordability out of reach, especially for new buyers.

The Fed & mortgage rates

Despite the parallelism, mortgage rates are not directly related to Federal Reserve actions.

Instead, they respond to inflation.

When people take out a mortgage, it is sold to investors in the bond market as part of a bundle of mortgages known as mortgage-backed securities.

Due to inflation and rising borrowing costs, lenders have had to raise mortgage rates to provide investors with better-yielding mortgage-backed securities.

As inflation eased in October, mortgage rates fell, and the bond market recovered.

The housing market represents a significant section of consumer spending.

If the Fed slows the growth in the cost of housing, it will probably have a domino effect on the economy.

“As long as new lease inflation keeps falling, we would expect housing service inflation to keep falling sometime next year,” said Jerome Powell.

“Indeed, a decline in this inflation underlies most forecasts of declining inflation.”

The Fed’s pace

The Federal Reserve consistently maintained rate hikes throughout its December meeting.

The Fed has raised rates aggressively by 75 basis points in four consecutive meetings.

“And the reality is, it’s working,” said JR Gondeck. “They started late, but they’re catching up to where things are.”

Despite the progress, the Fed must find a balance between remaining aggressive and acting too quickly.

The decision to raise rates by 50 basis points instead of 75 suggests the Fed is pushing for a soft landing rather than an outright recession.

“This way, Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” says Poljak.

The Fed needs to watch incoming housing market inflation data to arrive at a soft landing or moderate recession.

“The housing market is the leading indicator of a recession,” says Odeta Kushi.

“But traditionally, it has also aided the economy in recovering from one.”

Read also: Foxconn resumes production, iPhone city alive again

Projections

At its December meeting, the Federal Reserve will adjust rates and offer forecasts for next year.

The latest inflation report shows a positive sign, but the Fed needs more to curb rate hikes.

Additionally, the Fed has indicated it will be cautious about easing rate hikes until it sees evidence that inflation has been around or below the federal funds rate for several quarters.

However, additional hikes may not lead to dramatic changes in mortgage rates.

Signs of cooling inflation will likely stabilize mortgage rates at lower levels.

“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short-term rate by half a percent,” said Gondeck.

“But from there, it’s going to matter more what they say about the future, and specifically, the tone they use.”

Reference:

‘The worst is over’ for mortgage rates despite another looming Fed hike, experts say

Stock market in October show more positivity but isn’t completely in the clear

The stock market is known to experience significant declines in October through the years, including 1929, 1987, and 2008.

However, the stock market in 2022 managed to avoid similar problems.

Wall Street investors have nothing to fear as the month closes.

The market continued its October hot streak on Monday and enjoyed another strong rally.

Stocks

The Dow closed over 420 points (1.3%) on Monday.

Additionally, the Dow Jones gained almost 10% in October, recovering from the sharp falls in August and September.

Blue chip industrials and other giants of the US economy are still down 13% in 2022, including:

  • Apple (AAPL)
  • Microsoft (MSFT)
  • Coca-Cola (KO)
  • McDonald’s (MCD)
  • Disney (DIS)

Read also: The stock market gets a good start in October as the market rallies

Federal Reserve

The market rebounded this month, hoping the Federal Reserve would break its aggressive rate hikes to curb inflation.

Strong rate hikes are expected at the next Fed meetings on November 2 and December.

However, some people hope the Fed can pause the hikes next year.

Solid third-quarter earnings are also helping to strengthen stocks.

The bear market

The S&P 500 was up 1.2% on Monday, while the Nasdaq gained 0.9%.

The two indices show decent gains for October as well.

The Nasdaq is up by more than 3.5%, while the S&P 500 is up by nearly 6%.

The S&P 500 and Nasdaq are still down more than 20% each this year, which means they are in a bear market.

The Nasdaq was in the green on Monday, putting it in a favorable position.

Read also: Stock market settles into a steady pace after the worst day in US stocks

The Chinese market and other stocks

Several top Chinese tech stocks traded in the United States fell because of fears of a crackdown in China.

The crackdown comes from news that Xi Jinping will serve a third term as China’s leader.

Meanwhile, the e-commerce company Pinduoduo (PDD) lost more than 25%.

Electric car makers and significant Chinese tech stocks posted double-digit percentage losses, including:

  • Nio (NIO)
  • Xpev
  • Li Auto
  • Alibaba (BABA)
  • Baidu (BIDU)
  • Tencent (TCEHY)

Tesla shares fell 1.5%, while Starbucks fell 5.5%.

The fast food giant Yum! Brands (YUM) is down 2%, while Yum China (YUMC) fell 14%.

Yum China distributes several food brands in China, such as:

  • KFC
  • Pizza Hut
  • Taco Bell

Casino owners with properties in Macau, Wynn Resorts and (WYNN) and Las Vegas Sands (LVS) also fell.

Reference:

October surprise? Stocks continue to sizzle this month

The Federal Reserve’s efforts continue to be overshadowed by inflation

The Federal Reserve has been taking drastic measures against inflation with rapidly rising interest rates for months, but their efforts are hardly felt.

On Thursday, September consumer price data showed little or no change from March, when the Fed began its monetary tightening.

Total consumer prices increased 8.5% year-over-year.

Today, consumer prices have risen by 8.2%.

The Fed

In September, core prices rose 6.6% annually, the highest since 1982.

Christopher S. Rupkey, the chief economist at Fwdbonds, an economic research firm, wrote:

“This inflation report today was an unmitigated disaster. It shows whatever Fed officials are doing, it is just not working.”

The Fed has doubled down its plans to squeeze inflation out of the US economy by any means necessary.

They implemented massive rate hikes to dampen demand for goods and services.

Despite rising interest rates, there is virtually no sign of price easing.

Either way, the Federal Reserve is stoically forging ahead, betting that the country’s strong labor market can tolerate the stress of higher borrowing costs.

“The Fed will see this as a license to stay aggressive,” said Jan Szilagyi, the CEO of investment research firm Toggle AI.

Thursday’s inflation report is the last major economic overview Fed policymakers will take before their next meeting in early November.

The report guarantees another rate hike of 0.75%.

Investors currently have a 97% chance of a fourth consecutive three-quarter percentage point hike.

Financial pain

The Federal Reserve wants to continue using interest rates to ensure price stability.

Fed Chairman Jerome Powell acknowledged that the broader impact of rising borrowing costs would hurt households and businesses.

The Fed recently engaged in a mantra to inflict pain now rather than letting inflation seep into the psyche of consumers.

At the last meeting on Wednesday, Fed officials pointed out that the cost of insufficient action to curb inflation was higher than the cost of too much action.

The belief indicates that the Fed would drive the US economy into recession rather than a downward inflationary spiral.

Meanwhile, consumers endure the pain of high prices and high borrowing costs.

The struggle can also escalate with job losses.

The Federal Reserve believes that the strong labor market has contributed to inflation.

They also cited other factors beyond their attributions, including supply chain disruptions, the war in Ukraine and companies raising prices when costs fall.

Kurt Rankin, Senior Economist at PNC, said:

“Rather than walking a tightrope between a ‘soft landing’ and recession…the Fed now faces the potential of killing off the economy’s job creation impetus beyond a simple rebalancing of the labor market in the name of taming inflation.”

The fight against inflation

In the fight against inflation, the Federal Reserve is facing a tough battle.

The effects of interest rate hikes are likely to be felt in the real economy within a few months.

Fed vice chair Lael Brainard said:

The moderation in demand due to monetary policy tightening is only partly realized so far.”

He noted that the “transmission of tighter policy” is most evident in the housing market, as mortgage rates have more than doubled this year.

“We continue to see a tale of two economies in the data,” chimed in Sam Khater, the chief economist at Freddie Mac.

“Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving housing demand down precipitously.”

Unequal pain

Thursday’s CPI reports bring economists and investors into a reality where millions of Americans have deep feelings about spending more on basic necessities like food and shelter.

More and more people are managing inflation by relying on credit cards, which will only become harder to pay off as interest rates rise.

The “food at home” index was up 13% year-over-year last month.

Meanwhile, shelters grew 6.6%, the fastest in over three decades.

Despite rising mortgage rates, housing costs have become more brutal, according to RSM Chief Economist Joe Brusuelas, who also said:

“Whatever relief in core inflation that is in the pipeline… it is not flowing through to an easing in rents.”

According to Rupkey, rate hikes have won the battle against softening prices for core commodities but are losing ground against price hikes for the services sector.

“Today’s red hot inflation report brings the economy closer than ever to recession next year,” said Rupkey.

“Supply chain bottlenecks, a volatile global energy market, and rampant corporate profiteering can’t be solved by additional rate hikes,” said Rakeen Mabud.

Mabud is the chief economist of the left-leaning Groundwork Collaborative policy group.

“It’s time for Chair Powell and the Fed to step aside and for Congress to step in.”

Reference:

The Fed is losing the war against inflation

2023 to begin with bad news as unemployment rates are set to dominate the year

Efforts to control inflation prompted the Federal Reserve to take drastic measures, but the Bank of America warns that this could result in mass unemployment.

Bank of America took note of the Fed’s aggressive rate hikes and said the U.S. economy could potentially lose tens of thousands of jobs each month in 2023.

With September showing a strong job market, the Fed is doing all it can to turn things around by raising interest rates.

Aggressive rate hikes will therefore lead to lower demand for cars, homes, and appliances.

Inflation pressure

The Fed’s fight against inflation is building up pressure, which means that non-farm payrolls will begin to decline in early 2023.

As a result, more than 175,000 jobs were lost each month in the first quarter of the year, according to Bank of America.

The bank’s charts suggest that job losses will be recurring for most of 2023.

“The premise is a harder landing than a softer one,” said Michael Gapen, the head of US economics at Bank of America.

Ideally, the Fed would have slowed the labor market enough to bring inflation back to healthy levels without creating significant and permanent job losses.

However, Bank of America does not believe the Fed will make such a decision.

“We are looking for a recession to begin in the first half of next year,” Gapen said.

Unemployment peak

Despite the market slowdown, Friday’s jobs report showed that the United States added more than 263,000 jobs in September.

It brought the unemployment rate down to 3.5%, the lowest level last seen in 1969.

However, Gapen expects unemployment to rise between 5% and 5.5% next year.

Meanwhile, the Fed forecasts an unemployment rate of 4.4% in 2023.

The US Federal Reserve is raising interest rates at its fastest pace in four decades to curb inflation.

Fed officials said they are in no rush to get out of anti-inflation mode to help the economy avoid a slowdown or recession.

“They’ll accept some weakness in labor markets in order to bring inflation down,” said Gapen.

Fed officials say interest rates are expected to remain at tight levels for some time to come.

Gapen said that while recessions have rapid snapbacks, the Fed’s stance of holding rates high for a long time suggests that the situation is continuing.

“We could see six months of weakness in the labor market,” he said.

Recession

Meanwhile, some forecasters are bullish about the state of the job market.

On Monday, the Conference Board announced that the September Employment Trend Index had been ticked.

The index is a combination of leading labor market indicators.

They said this meant employment growth in the coming months, but employment growth is likely to slow from its recent pace.

On the plus side, however, those calling for a recession will not see unemployment rise like in 2008 or 2020.

Bank of America expects the unemployment rate to peak at 5.5% in 2023, after reaching a peak of nearly 15% in 2020.

“Although nobody wants to be callous about someone losing their job, this could be classified as a mild recession,” said Gapen.

Reference:

US economy will soon start losing 175,000 jobs a month, Bank of America warns