Twelve Charts This Week - 7/12/2024
Twelve Charts This Week - 7/12/2024
1
CPI inflation for June was released yesterday and it was lower than expected. Total 12-month inflation was 3% instead of 3.1% expected. The month on month change was a decrease of 0.1% instead of an expected increase of 0.1%. This data signaled to the market that inflation is still fading back to pre-covid levels. The Fed’s preferred measure, PCE (personal consumption expenditures) inflation, is at 2.6% even closer to the Fed’s target of 2%. The markets’ reaction was immediate: 1) bonds rose (Treasury 10-year yields down 10 bps), 2) gold and oil rose and 3) tech stocks fell while cyclicals and small caps soared (table below). The small-cap Russell 2000 index rose 3.57% while the Nasdaq 100 fell 2.24%. The most interest rate-sensitive S&P sectors (XLRE, XLB, XLI, XLE) gained while technology (XLC, XLK, XLY) lost ground. The S&P regional banking ETF (KRE, not shown in the table) rose 4.21%. See in the table in green the sectors that outperformed the S&P 500 in 2024-to-date and yesterday, and in red those that underperformed. As shown in the change from one column to the next, yesterday was a reversal of the narrow tech-positive theme that had dominated since January. If this action is an indication of things to come, we will see a CLEAR ROTATION IN THE STOCK MARKET IN THE WEEKS AHEAD, out of growth names and into cyclicals and value names. The CME FedWatch tool still views a rate cut at the July FOMC meeting as having only a probability of 6.7%, a negligible increase from 5.2% on Tuesday. We view the probability of such a cut as higher, say 30%. The Treasury market is already doing the Fed’s work to some degree, the 10-year yield having fallen from 4.7% in April to 4.2% now. But if the Fed acts earlier than most expect, the economy will have a better chance of avoiding a recession. In the event, small-caps, cyclicals and value will outperform tech and growth sectors, as they did yesterday.
🚨 Could be impacted by this: Fed policy, FOMC meetings, inflation, equity and credit markets, GDP growth, value vs. growth stocks.
2
Here is a chart showing the LOAN TO VALUE RATIO OF US MORTGAGES, the ratio of mortgage principals to home market values. It now stands at 48%, down from 70% a decade ago. Mike Simonsen, president of real estate consultancy Altos Research, says “it's really hard to overstate how strong a financial position American homeowners have.” With declining interest rates, we may see a fresh wave of cash-out refinances, in which homeowners use their houses as ATMs, taking cash out, raising their loan amounts (and loan to value ratios) and reducing their equity in their homes. This could be a big boost to consumer spending when mortgage rates drop back toward 5% or lower. Per the St. Louis Fed, the 30-year fixed mortgage rate shot up from less than 3% in 2021 to 7.7% in 2023 and now stands at 6.9%. All this is predicated on market values retaining their current levels. If market values fall 20%, the loan to value ratio will rise from 48% to 60%. (via @mikesimonsen)
🚨 Could be impacted by this: US economy, household balance sheets, mortgage rates, discretionary spending, travel and hospitality, housing, SPY, QQQ, XLY, XLP.
