Hello, hello, everyone. Welcome back to the Week in Charts. Charlie Belal here.
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Reach out today, creativeplanning.com slash Charlie. We're here to help. Okay, what are we going to be discussing today? A lot going on.
Of course, we have to start with the CPI report, talk about how that shifted Fed expectations. I'm going to tell you why the Fed's 2% inflation target is a complete farce. The rate cut trade-off.
So of course, the Fed's cutting rates. There's benefits to that. What's the trade-off?
What's the downside? Why did mortgage rates rise after the Fed cut rates? That's surprising. Some people talk about that.
What are they trying to hide? I'm talking about the monthly treasury statement that didn't come out yesterday was supposed to come out. What are they trying to hide there? The Goldilocks moment for the stock market for the economy in the US.
It's a rare moment here where everything seems to be working at once. And we'll end as we always do with something positive. And that's rising real wages in the US.
Okay, number one, rising prices at a slower pace. So prices, of course, still going up. It's just the rate. of increase that's going down.
And if we look at overall CPI here, you could see it in the light blue line there moving down to 2.4% in September. That was the lowest inflation rate in the US that we've seen since February, 2021. Now, a little bit hotter than expected. So the expectation was for 2.3%. So a little bit higher than that on a core inflation rate, which excludes food, which excludes energy.
3.3% it came in at. I think the expectation was 3.2. So a little bit higher than expected, but overall still trending lower. And why has it moved down? Why has it moved down since June 2022 when it peaked at 9.1%?
How did we get it all the way down to 2.4% today? Well, you can see here, these are the major components. Every single one of them is lower than where it was in June 2022. And you can see things like fuel oil and gasoline.
used cars and new cars actually declining over the past year big change from what we had in june 2022 if we look at transportation here you could see they still very elevated at eight and a half percent so better than june 2022 but still very very high and what's driving that in large part is auto insurance rates and if you've gotten a renewal from your insurance company recently you've likely seen this the crazy astronomical increases we've seen in auto insurance over the past few years, 52% increase in just a three-year period. That's the biggest increase we've seen in the US since 1975 to 78. So something's still going up at a rapid pace, auto insurance rates being one of them, far outpacing the overall rate of inflation. What's the most important component in CPI? That would be shelter.
And- it ticked higher in august and we said that was likely to be a one-off and that's exactly what it was it actually moved down to 4.9 percent first time below five percent in a long time lowest since february 2022 but as you'll notice in this chart here you can see still a huge gap between shelter cpi and what the rental market for apartments is showing here which is showing 16 straight months of declines of year-over-year decline so The expectation should be that this gap is likely to get closed in the coming months. I would say shelter CPI is still very likely to trend lower until some of this gap is closed. But at 4.9%, still elevated. And what we're seeing is that still contributing to... core cpi being higher than the headline rate and we can see here it had been going down pretty steadily from its peak in september 2022 and then the last few months core cpi just going sideways so this is something obviously the fed looks at very closely it tends to be more stable than headline cpi because it excludes particularly energy but also food which tend to be more volatile you can see here not making much headway over the last four months, simply going sideways.
And if we look at the inflation picture in a long-term basis here, how many consecutive months above 3%, it's now been 41 consecutive months in the US above 3%. You can see it hasn't been that high for that long since the early 1990s. So still very much elevated, I would say, looking at core CPI. What's the most absurd number? in the inflation report.
I talk about this every month, but until they change it, I'm going to continue to talk about it because the calculation here makes absolutely no sense. They're showing that health insurance in the US is down 33% in the last two years and 11% over the last five years. Obviously, everyone knows health insurance hasn't gone down over the last two years or five years in the US.
So just a crazy calculation that the BLS continues to use this idea. of retained earnings instead of looking at actual premiums. And that obviously should change, needs to change. So take everything you see in the CPI report with a little bit of a grain of salt because you have these crazy calculations that don't reflect reality.
Number two, market expectations here meeting now the Fed's expectations. So just a month ago, the market was much more dovish than the Fed expecting, many more rate cuts than what the Fed was projecting. And today...
we have the market completely in line with what the Fed is saying they're going to do. Here we have a look at the November meeting, less than a month away now. And what the market's saying essentially, no more 50 basis point rate cut. We're going to cut 25 basis points down to 4.5 to 4.75%.
And there's even a chance now the market's saying that the Fed won't cut at all. As I said on the last show, I don't think that's going to happen to Fed. is almost definitely going to cut again. And nothing in the inflation report, I think, changes that with that headline CPI number still moving lower.
And if we look at December, market now saying pretty strongly another 25 basis point cut there. So what the market's essentially saying, two more 25 basis point cuts. We're going to have 100 basis point cuts in total by the end of the year. And the big shift, though, is really for 2025. So A month ago, the market was essentially saying we're going to end 2025 at 2.8%.
Now we're at 3.4%. And that's much higher than what the market was thinking. And why is that occurring?
Well, we got a better than expected jobs report. We've gotten news on the economy that is not showing signs of recession, I would say. And as I'll talk about later, we have inflation expectations starting to move up.
So where is the market today? It's exactly in line with what the Fed is projecting. You can see here the Fed's projection for the end of the year for the Fed funds rate 4.4%, which would imply two more 25 basis point rate cuts.
And for 2025, 3.4%, you could see market now right in line with that expectation. Of course, all of these things can and likely will change as we get more data in the coming months, but I think pretty high probability at this point. we're going to get those two more cuts this year in 2025. It remains to be seen. I think it'll either be faster than what the Fed is projecting or slower, depending on how the data shakes out between now and then. So what about that 2% inflation target?
That is what the Fed keeps on saying. That's their goal. And they started cutting rates saying that they're confident that we've reached a pace that's going to get to 2% in the long run.
But why I say it's a farce is because it doesn't reflect the reality of cumulative inflation that we've had that's well above that 2% target since the beginning of 2020, when the Fed, of course, did their massive stimulus, printed a ton of money when the federal government did an enormous deficit spending. We've had now inflation 11% above that 2% target. We've had CPI annualized at 2%.
4.2 percent so more than double that two percent target since the beginning of 2020 and CPI isn't even at 2% yet. So we're at 2.4%. That's not 2% in my mind.
If you look at the cumulative inflation, look at the cumulative increases over the last four years, they're unbelievably high. You look at things like auto insurance, as I've talked about, 60%, fuel oil, 53% higher, home prices, 47%, gas prices, 44%, and on and on and on. This is the cumulative effect of inflation. And people are feeling that, of course. building month after month.
So it's great news that the inflation rate has come down, but that doesn't erase this above average inflation that we've seen since 2020. And my preference, as I said, would be to get this closer to that 2% trend line before you start thinking about rate cuts. Of course, the Fed not talking about that. They're just simply saying, well, what has the inflation rate done over the past year? And if it's getting close to 2%, well, then we feel good about that and we should start. cutting interest rates.
It remains to be seen if that's going to be viewed in hindsight as a mistake. If we look at the housing market here and why it's in a standstill, you can see here it's because the inflation rate for new home buyers has been astronomically high. You can see shelter CPI is up 25.6% since the beginning of 2020. But if we look at the mortgage payment needed to buy the medium priced home, that's up still over 80%. And that's even with mortgage rates coming down over the past few months so still very much unaffordable for most people in terms of looking at the housing market based on their incomes so this is the concept that not all inflation rates are equivalent everybody has a personal inflation rate and if you own a home and you're locked in a 2.8 mortgage uh you're sitting pretty good if you don't own a home and you're looking to buy a home and you have to stretch to do so you can see here the inflation rate for you is going to be much, much higher. So just keep that in mind.
The average in the US inflation rate is 2.4%. For some people, it's lower than that. For some people, it's much, much higher.
And looking ahead to October, this is what I would say also about the Fed's 2% target. We're not going to get there in October again. So this data isn't going to come out until after the Fed meets.
So I think we'll get that 25 basis point cut. But you can see here, the expectation from the cleveland fed is for cpi to move a little bit higher for october than where it was in september so moving up to 2.55 and you can see that core rate of inflation still above three percent they're expecting it to tick higher as well so here we have it still above two percent the fed is confident it'll get to that two percent long-term target but not erasing what's happened in the past and why is this expected to rise well the big part of that i think is going to be that energy component where where in september it was a huge spread between where we were this september with compared to last september so a big year-over-year decline helped push cpi lower you can see here that's starting to narrow because in the last few months of 2023 gas prices really moved to the downside so if we see an uptick in crude oil and gasoline over the next few weeks that gap is going to start to be closed and that will put some upward pressure on cpi but overall the housing component the shelter component is going to be the most important factor and if that continues to trend lower i think at least that puts a cap on core cpi as far as overall cpi much more influenced by these other factors and energy but overall i would say the fed should be very careful in rushing to cut interest rates because We're not even at that 2% target yet, and we're still well above it if we're looking at the last few years, 11% above that target, which is the way they should be looking at it, not just looking at it on a year-over-year basis. Okay. Let's discuss the trade-off in terms of rate cuts. There's benefits, there's costs to us, to cutting rates.
What is the big benefit? Well, people who are in credit card debt and they have high interest rates on their balances, we'll see some relief there. this is the latest data that we have which is credit card interest rates in the us at a record high almost 22 percent in the us and these are really tied to short-term interest rates like the fed funds rate you can see here when the fed started hiking interest rates the big increase here but the expectation is if the fed cut continues to cut interest rates this will be uh start moving lower this will be a relief for anyone with credit card debt you can see In terms of the credit that's being taken out, it's really declined over the past two years.
And the hope, I guess, in terms of the economy is that perhaps people will borrow more if these interest rates go down. You could say that's good or bad, depending on how you view credit. But you can see here the rapid deceleration when the Fed hiked interest rates starting in 2022. In terms of other areas, I would say the car market.
very influenced by financing. Over 80% of people finance the cost of a vehicle when they purchase that vehicle. And you can see we hit the highest levels since May 2001 in terms of new car loans. And that should come down also with Fed interest rate cuts because you have this tied to, it's 48-month financing, it's tied to shorter maturities.
But how about things like mortgage rates? and other things that are tied to longer term securities. We'll talk about that. That's not necessarily going to come down in lockstep with the Fed's rate cuts.
So what is the trade off here? What's the cost of easing too early or cutting interest rates? Well, it's kind of a hidden cost because it's going to come in the form of inflation.
And as Thomas Sowell once said, inflation is a way to take people's wealth from them. without having to openly raise taxes it's the most universal tax of all so all else equal easier money monetary policy may lead to higher inflation here in the months and years to come so that's the trade-off you'll have lower borrowing costs for these consumers that are using things like credit card debt but these people are going to feel the impact of higher inflation because of easy money policy the question is what's the balance between the two? Which of the two is more important in terms of the economy and what the Fed is saying?
It's more important now to focus on stimulating the economy because the employment market has slowed down. More important than that, to focus on that rather than focus on inflation. But again, there's an upside, there's a downside, there's a cost to cutting rates. There's no such thing as a free lunch. You can't ease monetary policy aggressively.
without seeing the cost of it. And the cost we'll only know in this hidden tax, which is known as inflation. Okay.
Why are mortgage rates rising after the Fed cut interest rates? A lot of people are asking this question. Fed's cutting rates. Shouldn't mortgage rates be going down?
Well, not necessarily because mortgage rates aren't tied to those short term securities that the Fed is targeting with a Fed funds rate, which is really just ultra short rates, one month. three-month treasury bills. If you look at the 30-year mortgage rate over time, you can see this enormous downtrend for 40 years from the early 1980s, and then it bottomed at 2.65% in early 2021. And you can see here the huge move higher. We've never seen anything like it from an all-time low going up to about 7.8% in a very short period of time.
That essentially froze the housing market, made it completely unaffordable because prices did not come down with this increase in mortgage rates. But you could see in anticipation of the Fed cutting interest rates, the mortgage rate came down over the past year significantly, hit a low of 6.12% before the Fed started cutting interest rates. But since then, the Fed cuts 50 basis points and it's been going up. So this is a weekly survey Freddie Mac does. up to 6.32%.
So 20 basis points higher there. But if we look at the daily survey from Mortgage News Daily, you can see even a bigger move up to around 6.6% from 6.1%. So about 50 basis point move higher after the Fed cut interest rates by 50 basis points.
So how is that possible? Why is that going on? It's because mortgage rates are tied to longer term treasury securities, things like the 10-year yield and the 30-year yield. and those yields have been rising and they've been rising because inflation expectations have been going up so you can see here 10-year break-even inflation rate hits a low here of around two percent in advance of the fed's rate cut fed cuts rates and you can see since then inflation expectations moving higher so the expectation is the fed interest rate cuts are going to lead to perhaps stronger growth but also higher inflation, 2.33%.
You can see here, and the 10-year treasury yield has moved up even more than that. So you can see that we bottomed here 3.63%. before the fed cut interest rates and now we're at 4.09 so really as i've been talking about the bond market really front ran the fed they were front running the fed betting on many many interest rate cuts perhaps too many as we saw in that previous section where the expectation was for the fed funds rate to be below three percent and now it's adjusting uh to a higher level because people are expecting inflation to be higher due in part to those interest rate cuts so where does that put us in terms of growth well if you believe that lower interest rates will stimulate higher growth in the short run that likely means another quarter of positive gdp growth for the us you can see here there was really no sign of a slowdown in terms of gdp in the second quarter three percent that was higher than where it was in 2023 so higher rates don't seem to be so far hurting economic growth and the atlanta fed is expecting the third quarter to also be above three percent when it comes out so the expectation is growth is still going to be strong so as long as that's the case you're not going to have a move a big move down in 10-year treasuries or 30-year treasuries and you won't have that big move down in mortgage rates that many are hoping for and then finally i would say on the inflation front what's driving those longer term inflation expectations it might be that we're entering a cycle now of money printing again this is still still too early to say but what you'll notice here this is a chart of m2 money supply growth year over year what you'll notice is we were trending lower for a long period of time we were in negative territory where that we're actually contracting the money supply but that has changed now we're now increasing money supply again up only two percent over the past year but Perhaps the expectation from the bond market is we're going to continue with this acceleration back higher. And of course, if this gets out of control again and we start printing money again, that's going to lead to higher inflation and higher long-term bond yields. So complicated situation in terms of trying to predict where the mortgage rate is going to be depending on the Fed funds rate.
For sure, if the Fed were to cut interest rates to zero, mortgage rates are going to decline and decline significantly. But. just 100 basis point move lower, you can't say necessarily how much of an impact that's going to have on the mortgage market in terms of the rate there because you don't know what the 10-year and the 30-year treasury yields are going to do. Okay.
We're going to discuss this monthly treasury statement that the treasury department is supposed to put out every single month. And in that monthly treasury statement, they're supposed to show the receipts, the outlays. So essentially, you're going to see the outlay.
what's the tax revenue another revenue coming in what's the what's the amount going out in government spending and is there a surplus or is there a deficit there's very rarely a surplus almost always a deficit and this report was supposed to come out yesterday supposed to come out like clockwork on the eighth business day of each month at 2 p.m and i go and check it when it comes out and this is what it says delayed at the source you go to the treasury department's website No explanation there. You go to Janet Yellen's Twitter feed, nothing there, no comment whatsoever. So the question is, what are they trying to hide by not releasing this report?
I'm not sure, but I can almost guarantee that it's not going to be news that there's a big surplus for the month of September. It's probably going to show another big deficit. Perhaps they want to delay the reporting on that.
And this is what's going on in terms of national debt, just absolutely exploding higher. over the last few weeks we're already at 35.7 trillion dollars now 4.25 trillion dollar increase from june of 2023 when the debt ceiling was was suspended so enormous enormous increase particularly over the past few weeks just you could see the vertical spike higher in terms of issuing new debt and the interest rate the interest expense on that debt getting more costly every single month we're at over 1.1 trillion now, a record high, more than doubling over the past two years. And this is the question, what are they trying to hide? Probably another big deficit number.
What I talked about a few weeks ago is we had the last four months, we had essentially 1.6 trillion deficit in just four months, 347 billion in May, 660 billion in June, 244 billion in July, and 380 billion in August. So what's going to be the number for September? We don't know, but I'm guessing. it's going to be another big deficit.
So just massive, massive spending in a very short period of time. So I'll report back when they issue that treasury statement about what it showed and what they were trying to hide here. But it's just amazing to me that they could have this released.
They're supposed to put it out and they give no explanation. If a public company did that, people would be fired. The stock would crash over it, but there doesn't seem to be any accountability in terms of the government reporting. this basic information that every american citizen has a right to know so we'll see how long it's delayed hopefully it won't be long and we'll dig into what the numbers show there but my expectation is it's going to be more deficit spending that's the trend and that trend's likely to continue as i've talked about until it becomes a real crisis we aren't at that point just yet let's talk about the goldilocks moment going on in the stock market in the economy it's a very rare moment in time where everything seems to be perfect not too hot not too cold just like in the goldilocks story what we have here is inflation first of all cooling 2.4 percent lowest since feb 2021 so again not too high not too low jobs market still growing 45 straight months low unemployment rate still 4.1 percent you have wage growth above average four percent increase over the past year economy still expanding 51 straight months expected to be another quarter of growth in q3 when we get that data above three percent you have corporate earnings s&p 500 earnings still at record highs expected to hit another record high with the release this quarter in q3 and finally with all that going on you have the fed easing monetary policy again already cutting 50 basis points in september expected to do another 50 basis points by year end you and more in 2025. So everything seems to be working on all cylinders, not too hot, not too cold.
And the market likes that. And they like the fact that earnings are still going up, still hitting record highs. We have JP Morgan reporting today, a number of the big banks reporting, all of them beating expectations, all of them seeing their share prices rise with that report. So you have JP Morgan, we have Wells Fargo, you have Bank of New York, you have BlackRock. all reporting better than expected earnings all seeing their share prices rise you can see here jp morgan stock hitting another record high today 35 gain this year outpacing the s p 500 big beats on the top line and bottom line red revenue 43.3 billion versus 41.6 expected earnings per share 437 versus 401 expected s p 500 hits its 10th 100 point milestone of the year just an incredible run so a thousand points so far this year and counting for the S&P 500 10 of these in 2024 you can see pretty steady yet in January February March May June July September now again in October so the run-up's been very steady throughout the year we had two little corrections but the market racing back to new highs and how about this this is one of my favorite charts comparing where strategists thought we were going to end the year with where we are today.
We're at 5,800 for the S&P 500. That's 19% above the average price target for Wall Street strategists. That's 400 points higher than the most optimistic projection from Wall Street strategists. So just incredibly unexpected run from the stock market. The average expectation was a gain for the S&P 500 of less than 2% this year.
and here we are up well over 20 at this point we got 44 all-time highs now for the s p 500 this year and we have the 17th best start to a year in history for the s p 500 you have to go back to 1997 and 1995 to find stronger starts that was the last time we've seen the s p start this strong you could see that in this chart here we're at the green line at this point well above where we are during the average year And you can see here only two lines better than this since 1990. That was 1995 and 1997, which were both huge up years for the stock market. And we've done so this year. We've done this another 20 plus percent year for the S&P with very little downside.
So on a closing basis, the biggest drawdown for the S&P 500 this year is eight and a half percent. That's below what we see in the median year, which is around 13 percent. So little downside. big upside very unusual for the market to be this strong uh with this little on the downside and if we look at the credit markets just unbelievable recently we hit the lowest credit spread for high yield bonds so this is the spread between what you earn in a high yield bond and what you earn in a risk-free treasury 2.89 that's the tightest spread that we've seen since june 2007. so the expectations are from these credit investors that we're going to have very low default rates going forward are these expectations usually correct well time will tell here but these i would say are extremely optimistic obviously in 2007 i was a very poor a time to be thinking credit spreads are going to be low and stay low forever. Only a year later, you can see how they spiked higher in 2008, hit record highs.
And so we don't know what's coming next, but what we know today is it can't get much better than what it is today in terms of the stock market, the economy, and credit markets all in sync together, not too hot, not too cold. Okay, let's talk about something positive here for the American worker that's rising real low. wages in the US.
This is the most important thing that I look at every single month. And that's because it's really what drives long-term prosperity. So what we have in the past year is hourly earnings up 4% over the past year.
And we have the inflation rate here in the past year of around 2.4%. That spread between the two is what leads to long-term prosperity. And now it's the 17th straight month with a positive spread, 1.5% higher.
wage growth, then increases in prices. And what a turnaround from what we saw for over two years, 25 consecutive months of negative real wage growth, where people's incomes weren't keeping pace with inflation. This is moving in the right direction. Hopefully this continues. This is why I say the Fed needs to be very careful.
We need to keep inflation low in order to have this prosperity going forward. This was the period where we had super high inflation, obviously. negative real wage growth.
You're moving in the wrong direction. Your purchasing power is eroded every single month. We want to see this continue for the American worker, but very good sign. So hopefully this is a trend that will continue into 2025. With that, we'll end it right there. Have a great weekend, everyone.
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