Another Strong Week

The major averages finished another strong week as earnings season gets underway. The S&P 500 gained 64 points or 1.1%, the NASDAQ increased 205 points or 1.1% while the DOW added 511 points or 1.2% despite a volatile beginning.

Elon Musk’s Cybercab and Robovan event failed to materially impress investors. Leading to sharp declines in the stock price. Relations between Boeing and its unions took a real turn for the worse. Causing significant share price losses mid-week. Hurricane Milton pounded Florida as the state gets hit with a 2^nd huge hurricane in under 2-weeks. Something that will show up in the economic data for October.

Inflation

The September CPI report came in slightly hotter than expected, at 3.1% but not enough to meaningfully change the outlook for U.S. inflation. Headline CPI rose 0.2% in the month, excluding food and energy prices consumer price inflation was a tenth stronger at 0.3%. Pump prices fell 4.1% helping to keep a lid on inflation. Offset by a 0.4% rise in grocery prices. Core goods prices snapped a 6-months string of declines, up 0.2%.

With deflationary trends expected to continue, normalization of monetary policy should follow as te Fed slowly cuts rates further this year and into 2025.

What about the Dollar?

More than a few financial pundits have been calling for its debt based demise for quite some time. Calls that have grown louder of late with the national debt up 50% since Covid hit in 2020. Looking at the latest 30-Year Treasury Bond auction shows record foreign demand. For Uncle Sams best paper. Indirect bidders’ took a record 80.5%, followed by Dealers with 12.2% and Direct Bidders 7.6%. Despite the Fed prodigious and growing need to finance its deficits. Theres no shortage of willing buyers as the Dollar marks another strong week.

But, the recession?

Goldman Sachs cuts its recession probability to just 15% over the next 12-months, from 20%. In line with the unconditional long-term average probability of 15%, according to Jan Hatzius, head of Goldman Sachs Research and the firm’s chief economist. Meaning that there is always a 15% chance of recession. So this effectively means no chance of recession in the next 12-months as the economy notches another strong week. Given the available data I wholeheartedly agree.

Mortgage Rates

Peter Berezin of BCA Research took a look at the effective average mortgage rate, derived by dividing total interest payable by the total volume of mortgage debt in force. Much of it very low interest from the 2020 and 2021 period. While the latest 30-year rate is about 6.2%, the average is just 3.9%. Berezin goes on to argue for more interest rates cuts as a result. If mortgage rates do not change, the average rate will eventually converge to the current mortgage rate as older, lower-rate mortgages are paid off and replaced by newer, higher-rate mortgages. As a share of disposable income, this would increase mortgage payments by 1.6%, forcing homeowners to cut spending on other items. Thanks to BCA Research for the chart.

That’s all for this week folks, I’ll see you again next Friday.

Best, Caleb

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