HYLS - The Markets The Data The Pain

2023-07-07 19:30:00 ET

Summary

• Look around, look almost anywhere, and the economic data is getting painful. You can start with the monthly ADP report.
• The ADP report stated that 497,000 new jobs were created in June. This was far past expectations, with the consensus view being around 220,000 new jobs and almost double the number of jobs created in May.
• The ADP jobs report contributed, in large part, to the miserable bond and equity markets on Thursday.

Look around, look almost anywhere, and the economic data is getting painful. You can start with the monthly ADP report. They stated that 497,000 new jobs were created in June.

This was far past expectations, with the consensus view being around 220,000 new jobs and almost double the number of jobs created in May. After the ADP report, I can assure you that people will be keeping a careful eye on the Labor Department's June jobs report, which is due out on Friday morning.

The ADP jobs report contributed, in large part, to the miserable bond and equity markets on Thursday. I have said for months that the bond markets were on the verge of lower prices and higher yields, and that the 10-year Treasury was going to break 4.00%.

This was exactly what happened yesterday with the 10-year down 25 basis points to yield 4.03%. Consequently, mortgage rates are climbing, as CNBC now pegs the average rate at 7.22%. You can expect a serious negative effect on the housing market now as housing becomes more unaffordable with the rise in rates.

Besides the 10-year Treasury, the longer end of the Yield Curve backed up significantly, with the 30-year Treasury down 102 basis points. It also significantly affected the other fixed-income markets.

Bloomberg’s IG Corporate Index is now yielding 5.57%, Bloomberg’s High Yield Index yield has risen to 8.58% and Bloomberg’s Municipal Index now yields 3.52% which were all major jumps in just one day. Unfortunately, I do not see this ending anytime soon as bond prices continue to drop as the yields rise.

Further, the rise in interest rates will have a significant impact upon the revenues and profits of many companies that have loans and bonds that will need to be refinanced during the next twelve months. I am not forecasting gloom and doom, but the pain will not be insignificant, in my estimation.

Much of this is being driven by the Fed. They are dead-set in their battle with inflation, seemingly regardless of its effect on the economy and the markets. Statements by many of the Fed’s Presidents and Governors enforce this view, as one after the other speaks publicly about their Inflation battle. The recent one-time pause in raising rates may be the best the markets are going to get for the balance of this year.

There are other considerations for the American economy besides Inflation, but they seem to take no notice of the collateral damage that they are causing. This isn’t the time of a “Boom Town,” this is just a time of “Boom,” in my opinion.

I also foresee more trouble in the equity markets with “AI” being fraught with the costs of invention and the interest rate price of invention and the possible mergers and acquisitions in this sector.

Whether it is bank loans, private equity, or bonds, higher interest rates will be a negative overall for everyone. The banks are also cutting back on lending as they consider our rising rates as a reason to be much more cautious in lending money to both people and corporations.

I prefer “income” as an offset to all of this and as long as the income beats the rise in rates and Inflation, I think that “income” will be a continuous winner. Undoubtedly, this will change at some point, but not yet, in my estimation.

This is a time of caution and that is the approach that I am taking.

Original Source: Author

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