Disinflation forces market to rethink additional rate hikes beyond July’s expected increase. – Halyard’s Weekly Wrap – 7/14/23
Bond and stock prices rallied sharply this week, but the biggest news came on Wednesday when the Securities and Exchange Commission amended the rules by which money market funds operate. It was the third time in 15 years that the SEC changed money fund rules. The moves are designed to prevent panicky investors from pulling money during times of market stress such as those witnessed in 2008 and 2020. Our take is that they make money market funds even less attractive to investors. The specific changes are that funds would impose a fee of up to 2% when net daily redemption exceed 5%; the funds are now required to hold 25% of the assets under management in overnight holdings, up from the previous mandate of 10%; and the funds will be required to hold 50% of assets in holdings that mature in one week, up from 30%. Funds have 18 months to become compliant with the rules.
On to the market moving news of the week – inflation. The consumer price index, ex-food and energy, registered a better than forecast 4.8% year-over-year, besting the 5.0% forecast and the 5.3% recorded last month. We’re somewhat skeptical of the improvement as a big driver was falling airfares which doesn’t jibe with Delta airlines profit beat and forecast boost announced on Thursday. The upbeat report on inflation continued with the producer price index ex-food and energy, which rose 2.4% year-over-year, down from 2.8% last month.
The news was greeted with jubilation as stock and bond investors bought heavily. For the week, the yield-to-maturity of the 2-year treasury note plunged from its recent 5% high to 4.72% as speculation bubbled that maybe the Fed won’t need to raise rates at the end of July. Equity traders got wind of that speculation and took the S&P 500 to a new 52-week high. Unfortunately, FX traders didn’t like the news and pushed the greenback sharply lower making the cost of the European vacation so many Americans had been looking forward to materially higher. Since last October, both the Pound Sterling and the Euro are about 15% more expensive.
Looking to next week, Q2 earnings releases will pick up in earnest and offer a clearer picture of the health of the banking system and the consumers’ propensity to spend. Retail Sales results for June will be released on Tuesday and a smattering of housing data is to be released throughout the week. From our perspective both stock and bond prices look vulnerable.
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