ACTV - So Far Price Instability

Summary

• The CPI number, which will be announced this week, will affect all of the markets and is going to significantly move both the bond and equity markets.
• What is interesting to note is the difference between the annual rate and the latest quarterly rates. It seems as if the Fed is just concentrating on the yearly rate, as the quarterly rate is nearing its range.
• Bond prices for all the fixed-income markets are down so far this year, and yields have risen. However, with the cost of borrowing money rising, the “credit risk” issues have multiplied as well.
• Equitiesin general are also starting to get nervous about the Fed’s rate raises and theincreased cost of borrowing money.

The big mover for this week, in my view, is going to be our next inflation number, the Consumer Price Index, which will be announced Tuesday at 8:30 am EST. This number will affect all of the markets and is going to significantly move both the bond and equity markets, in my opinion. Caution is advised.

What is interesting to note here is the difference between the annual rate and the latest quarterly rates. It seems as if the Fed is just concentrating on the yearly rate, as the quarterly rate is nearing its range. I continue to think that we will have at least two more rate hikes by the Fed, however, and then it will be a “stop.” There is not going to be a “pivot” anytime soon, in my viewpoint.

“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate the Committee’s effort to restore price stability.”- The Federal Open Market Committee

Well, they certainly haven’t achieved any “price stability” to date. Bond prices for all of the fixed-income markets are down so far this year, and yields have risen. The biggest loser has been the high yield market. The Bloomberg High Yield Index now stands at 8.38%, so we finally have some bonds that yield more than the annual inflation rate. However, with the cost of borrowing money rising like the moon in some evening’s sky, the “credit risk” issues have multiplied as well. Don’t fool yourself, our higher borrowing costs are going to hit a multitude of companies in both revenues and profits, and some, in my opinion, will be hit quite hard.

What is also of concern to me is our yield curve. When the 6-month Treasury bill is the height of the yield curve, then you know that things have run amok. The 6-month bill now yields 117 basis points more than the 10-year Treasury note and 108 basis points more than the 30-year bond. The spreads here indicate to me that some sort of recession is on the horizon and that some sort of soft landing may not be achieved.

Equities in general are also starting to get nervous about the Fed’s rate raises and the increased cost of borrowing money. We began 2023 on a good footing, but now things are getting somewhat dicey again, as indicated by the chart below.

Then we have balloons and other objects floating across our sovereign air space and Russia hinting that another country might be invaded, and I would say that the overall “risk factor” is increasing for our country and for our markets. I fully admit, I am cautious by nature, and all of this is only increasing my caution.

It's hard to be frightened of a danger which you didn’t know existed. I am pointing out some dangers today.

They exist!

Original Source: Author

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