Investors are forever chasing the next bit of economic news in the hope of determining the financial markets’ direction.
Personally, for money management, I let rules-based systems guide me and view the news more as background noise.
This week, there will be much said about the Jackson Hole Economic Summit, a three-day annual international conference put on by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming.
Central bankers from around the world will convene at the meeting to discuss global and financial trends.
The 2023 event, which marks the symposium’s 46th year, will focus on the theme “Structural Shifts in the Global Economy” and will explore several significant, and potentially long-lasting, developments affecting the global economy.
While the immediate disruption of the pandemic is fading, there will likely be long-lasting after-effects for how economies are structured, both domestically and globally, as trade networks shift and global financial flows react.
Federal Reserve Chair Jerome Powell’s remarks will be streamed on the Kansas City Fed’s YouTube channel, youtube.com/kansascityfed on Friday, Aug. 25 at 10:05 a.m. ET/8:05 a.m. MT.
This week’s meeting comes at a pivotal time.
The Ten-Year U.S. Treasury interest rate has recently hit the highest level since 2007.
And the long end of the market, represented by the 30-year Treasury, has fallen apart, as indicated by this weekly chart.
Remember, as bond prices fall, yields rise, impacting various things such as mortgages, which have surged over 7%, causing a slowdown in homebuilding.
There are several headwinds facing the U.S. Treasuries.
To begin with, despite numerous forecasts for a recession, the Atlanta Fed’s real-time GDP growth is tracking close to 4% for the third quarter.
There has also been an uptick in energy prices, a heavily weighted component to commodity indexes.
Each of these suggest that inflation may not be coming down to the Fed’s target rate any time soon.
But probably the biggest challenge the Fed is facing is the fading demand stemming from historical buyers of U.S. Treasuries.
China U.S. Treasury holdings just hit a 14-year low at less than $850BN.
Saudi Arabia’s stockpile of U.S. Treasuries has fallen to the lowest level in more than six years and is now less than $100BN.
As Japanese long-term yields increased due to an adjustment in monetary policy, the largest foreign holder of U.S. Treasuries, Japanese investors, have become less interested in U.S. bonds.
The diminished demand is very bad news as U.S. interest expenses have surged by about 50% this past year, to nearly $1 trillion on an annualized basis.
Last but not least, the diminished demand is coming at the time of heavy U.S. Treasury supply ahead. As budget deficits explode, the U.S. Treasury will sell $1 trillion in debt this quarter, the second highest in history.
No doubt this heavy supply is what is weighing down the market.
But that may be more than temporary.
Laws like the Infrastructure Act and the Chips and Science Act will add additional federal spending over the next decade, threatening to inflate the debt further.
For these reasons, I continue to believe that the bond market is an important market for investors to focus on.
Higher interest rates will most certainly have an impact on stocks by reducing stock multiples which are historically higher than average.
If you’d like to talk more about how to position yourself to be ready for the changing markets, you can schedule an appointment today with one of our experienced advisors who will guide you through our various adaptive investment models.
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