All major indexes closed lower as a variety of concerns came to the fore, mostly surrounding interest rates (see the first three bullets immediately below). Keep in mind that during the Summer months, volume is historically low which results in increased volatility. That said, the concerns are real, especially the $40 trillion in debt. For now, we’ll chalk this up to a fractional selloff amidst the waning “dog days of Summer.” Nonetheless, we’ll keep an eye out.
· The U.S. Department of Treasury announced that it is “increasing, by at least double, the size of liquidity support buyback operations for longer-dated nominal coupon securities (the 10-year to 20-year sector and the 20-year to 30-year sector). The current maximum size of $2 billion per operation will be at least $4 billion per operation.” In layman’s terms, Treasury is responding to investor concerns over rising interest rates, especially at the long end, and its economic impact. After making the announcement U.S. Treasury Secretary Scott Bessent asserted that the move was made in response to a “mispricing” of those bonds and that they did not accurately reflect underlying fundamentals.” Bessent also noted that the purchases could very well surpass the initial $4 billion. Ironically, this move by Treasury is the exact opposite of what Fed Chair Kevin Warsh is doing, as by shifting away from forward guidance, in essence, the Fed will let the financial market interpret and react to the data rather than telegraphing their every move.
· 30-Year U.S. Treasury Pops to Its Highest Yield Since June 2007. Over the past few months bond investors have become increasingly concerned over the length of the war with Iran, higher energy prices, the specter of lasting inflation, the competition for investment dollars as AI hyper scalers turn to the bond market to fund their billions of capital expenditures and the rising U.S. Public Debt. The result has been an increase in interest rates right across the yield curve with the long-end bearing the brunt of the selloff. We are not chasing the long-end of the bond market, choosing to spread client dollars across the short- to intermediate-end, with an eight-year max. We suggest investors managing their own funds do the same.
· Tuesday, Total U.S. Government Debt breached the $40 trillion mark or approximately $120,000 for every U.S. Citizen, this, as this year’s budget deficit reached $432 billion as of July. Ten years ago, government debt totaled less than $20 trillion.
· This past Wednesday the Fed released the minutes from their July meeting and in addition to discussing the rationale behind their 9-3 vote to hold rates steady, members discussed the possibility of holding six meetings next year rather than the current eight. Within the summary of the meeting was the following: “Many participants assessed that policy tightening would likely be necessary if inflation did not decline” and “some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return on inflation to 2 percent.”
· Merck (MRK) and Moderna (MRNA) announced positive initial results from a late-stage drug trial to treat melanoma, the deadliest form of skin cancer. According to Moderna CEO Stephane Bancel, “these Phase 3 findings represent a pivotal moment for the field of cancer research. For many years, the idea of creating an mRNA treatment designed specifically for an individual patient’s cancer was aspirational. We are not helping turn that vision into a reality.” Fingers crossed.
Economic Data That Drove Market Sentiment This Past Week…
- The Conference Board reported that its U.S. Index of Leading Economic Indicators edged 0.2% lower during July, after declining 0.1% in June. The US LEI has risen 0.2% over the trailing six months, a substantial improvement from the 1.3% drop over the previous six months. According to Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators at The Conference Board, “the Leading Index for the US ticked up in July, marking the fourth increase over the past six months. Most components were positive in July except consumer expectations, which continued to be a notable drag on the overall index.” (Source, The Conference Board)
- Housing Starts slumped 12.4% or by 176,000 to a seasonally adjusted annualized rate (SAAR) of 1,239,000 during July from 1,415,000 in June (-13.5% y/y). The number of starts during May represented the lowest since May 2020, a period of COVID related lockdown. A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units built annually to account for household growth and to replace existing stock. During July, Single-family housing starts fell 9.9% or 89,000 to 808,000 (-15.7% y/y). Meanwhile, Multifamily housing starts fell 15.6% to 421,000 in July (-7.1% y/y) from 499,000 during June. Building Permits, a key barometer for future starts, rose 69,000 to 1,443,000 in July as compared to 1,374,000 during June (3.1% y/y). (Source, U.S. Census Bureau)
- U.S. Export Prices fell 1.3% during the month of July (8.2% y/y) after slipping 0.7% in June. Import prices fell 0.4% during July (5.9% y/y) after falling 0.3% in June. Agricultural export prices rose 1.0% during July (5.7% y/y), after edging 0.1% higher during June. Non-Agricultural Export Prices fell 1.5% during July (8.5% y/y) after falling 0.7% during June. Please note that import and export prices are not affected by tariffs as they are measured prior to taxes. (Source, U.S. Bureau of Labor Statistics)
- Industrial Production, a measure of strength in the manufacturing, factory and utility sectors, rose 0.2% during July (1.1% y/y), after rising 0.3% during June. Capacity Utilization improved to 76.3% during July from 76.2% in June, but has dipped from 76.4% y/y. Manufacturing Capacity rose to 76.0% from 75.9% m/m and as compared to 75.9% y/y. (Source, U.S. Federal Reserve)
Economic Reports scheduled to be released this week, include the following – on Tuesday, July New Home Sales and August Consumer Confidence; on Wednesday, July Durable Goods Orders, Q2 Gross Domestic Product (First Revision) and July Personal Income and Spending; and, on Thursday, Initial Weekly Claims for Unemployment Benefits and July Wholesale Inventories.
Several potentially market moving companies are scheduled to report earnings, to include BJ’s Wholesale Club (BJ), Dick’s Sporting Goods (DKS), Zoom Communications (ZOOM), CrowdStrike (CRWD), Kohl’s (KSS), Nvidia (NVDA), Okta (OKTA), Salesforce (CRM), Darden Restaurants (DRI), Lennar (LEN), Oracle (ORCL), Kroger (KR), Best Buy (BBY), Dollar General (DG), Ulta Beauty (ULTA), Workday (WDAY) and Lovesac Holdings (LOVE).
General Disclosure:“This presentation is not an offer or solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. Fagan portfolio characteristics and holdings are subject to change at any time and are based on a representative portfolio. Holdings and portfolio characteristics of individual client portfolios may differ, sometimes significantly, from those shown. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities listed.
Additional information including management fees and expenses is provided on our Form ADV Part 2. The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Bond Investments are affected by interest rate changes and the credit-worthiness of the issues held in the portfolio. A rise in interest rates will cause a decrease in the value of fixed income positions. Past performance results are not indicative of future results.”
