Yields Hit Highs Then Reverse In October – Fixed Income Review

Yields on long-term Treasury bonds fell at the end of October as the Fed, the European Central Bank (ECB), and the Bank of England all held rates steady. Many analysts expect to see an unwinding of tight monetary policy in the coming months, leading to a possible decrease in bond yields. The yield on the 10-year Treasury ended October at 4.88% after reaching a 16-year high of 5% earlier in the month, appearing to be a downward trend to analysts. Stubborn inflationary pressures may keep rates from falling too quickly. (Sources: Treasury Dept., Bloomberg, EuroStat)

Global Stocks Hesitate As Uncertainties Mount – Equity Overview

Global stocks hesitated in October as concerns mounted regarding the escalation of the crisis in the Middle East. Earnings and economic headwinds also remain a focus as more companies report slowing earnings growth and conservative growth expectations. Major domestic equity indices were able to minimize devaluations during the month of October, ending the month minimally lower than the end of September. International developed and emerging market indices saw more of a pullback in October than U.S. indices, primarily due to a stronger dollar following the start of the Middle East conflict. (Sources: S&P, Dow Jones, Bloomberg)

Bank Deposits Heading Downwards – Banking Sector Overview

Consumers have been slowly depositing less money into their bank accounts over the past three years. As the pandemic shuttered restaurants and retail stores in 2020, bank deposits increased as consumers spent less and instead saved their cash. Generous government stimulus programs also led to consumers saving more as unused cash landed in bank deposits.

As businesses reopened and consumers began spending again in 2021, bank deposits fell as consumers decided to spend rather than save. Inflation also contributed to less savings and falling bank deposits as consumers found themselves spending more as the post-pandemic recovery drove prices higher.

Recent higher interest rates offered by banks did entice some to deposit more, yet deposits remain much lower than they were even before the pandemic. Banks struggled for years to capture deposits as rates stood at multi-decade lows up until 2022 when the Fed commenced its rate hike strategy. Some bond analysts believe that rates may start to decline as the Fed reacts to slowing economic data signaling dissipating inflation and consumer confidence.

Source: Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series

How Deflation Develops and What It Does – Inflation Overview 

A gradual devaluation or decline in overall asset prices is known as deflation, which leads to lower prices on most goods and services. This eventually creates an unfavorable environment for companies to raise prices and maintain already elevated profit margins. Ironically, what has led to this environment are the lingering effects of inflation. As the pandemic diminished and consumers spent more, companies raised prices as demand increased, eventually bringing about inflation. Now, as demand dissipates and consumers spend less, prices head lower.

Economists suggest that long-term yields can directly portray deflation. As the 10-year Treasury bond yield has fallen since its peak in October, nominal GDP along with inflation has slowly fallen. Real wages have also contracted, leading consumers to refuse to pay higher prices but demand more lower-priced goods. Retail stores have resorted to discounting in order to increase sales and reduce unwanted inventories.

Commodities across the globe are also reflecting deflationary characteristics as prices have pulled back from the highs of 2021 and 2022, including lumber, natural gas, aluminum, copper, and wheat. The International Energy Association (IEA) for the first time predicted that global demand for oil will reach a peak this decade, indicative of possibly lower oil and gasoline prices in the future.

Fed Chair Jerome Powell mentioned that elevated long-term bond yields lessen the pressure for tighter monetary policy, meaning that the Fed may not need to raise rates further, thus allowing rising bond yields to slow economic activity.

Sources: Treasury Dept., Federal Reserve, IEA

Sources: Federal Reserve, Treasury Dept., Social Security Adm., Bloomberg

Baby Boomers Working Past Retirement – Demographics 

This year the youngest baby boomers are now 59 and the oldest are 77, according to the Bureau of Labor Statistics. As more baby boomers reach retirement, good health and financial obligations are driving more to work longer or find a new job.

As baby boomers retire, some are finding it necessary to return to work even in their retirement years. Data released by the Labor Department show that many baby boomers may have worked for the same employer for years, then retired, yet find themselves seeking work thereafter. There hasn’t been a growing trend of retirees doing this yet, but there has been a consistent number.

As of this past month, there are over 11.3 million workers age 65 and older which account for 18.8% of the total population, relative to 25 to 54-year-olds which represent over 103.7 million workers making up 81.0% of the employed civilian labor force.

Source: BLS; https://www.bls.gov/web/empsit/cpseea13