Consumer Rates Remain Elevated – Fixed Income Overview

Interest rates experienced some volatility in August due to uncertainty surrounding inflationary pressures and intended Fed policy. Elevated rates on consumer loans such as credit cards and mortgages continued to place pressure on shoppers and home buyers.

The yield on the 10-year Treasury bond closed the month at 4.09% after reaching 4.34% in August. The average rate on a fixed 30-year mortgage fell to 7.18% in late August, down from 7.23% earlier in the month. Rates this same time a year ago averaged 5.66% on a 30-year fixed mortgage. Some analysts believe that rates may have started to change course, as the Fed ponders holding back from further rate increases. (Sources: U.S. Treasury. Federal Reserve)

Pullback In August Affects Equity Indices – Domestic & International Equity Update

Domestic stocks experienced a retraction in August as future earnings came into focus along with lingering inflationary pressures on company expenses. The S&P 500 fell -1.6%, culminating in the second monthly decline so far in 2023. The Dow Jones Industrial Index as well as the Nasdaq declined with similar pullbacks. September has historically been a volatile month for the indices as uncertainty before the year end and government fiscal mayhem have hindered equity performance.

Energy was the only sector of eleven sectors in the S&P 500 Index that was positive for August. Such broad pullbacks in multiple sectors are closely watched by analysts as an indication of a possible broadening of market weakness.

International and emerging market equities saw a more substantial pullback in August, with the developed market MSCI EAFE Index retracking -4.1% and the emerging market MSCI EMG MKT Index declining -6.36%. Currency volatility in addition to global expansion concerns fueled the overseas markets. (Sources: Dow Jones, S&P, Nasdaq, Bloomberg, MSCI)

Producer Prices Heading Lower, What It Means – Producer Inflation

The Producer Price Index (PPI) measures the selling prices domestic companies receive when purchasing everything from raw materials to products themselves. Similar to how the Consumer Price Index (CPI) tracks prices consumers pay for goods, the PPI tracks prices that corporations pay.

With the PPI steadily decreasing to its lowest growth rate since 2020, corporations are now forced to pay far less for commodities than previously. This affects companies across a wide variety of industries and is a leading indicator of what may soon trickle down to CPI. With companies paying lower prices, consumer prices have historically followed and continue their downward path as has been exemplified in recent months.

Sources: U.S. Bureau of Labor Statistics, Federal Reserve Bank of St. Louis

Housing Market Is Among The Least Affordable In U.S. History – Housing Market

Measured by the Housing Affordability Index, the affordability of homes has been steadily eroding since early 2021. Factors affecting affordability include home prices, mortgage rates, and household incomes. With historic inflation outpacing income growth, home buyers in the U.S. have been unable to keep up with rising prices and mortgage rates.

When the Fed increases interest rates to combat inflation, mortgage rates are similarly affected. The average 30-year mortgage rate rose to a high of 7.24%, the highest since 2001. This is a significant difference to the lows reached in 2021 when the average 30-year mortgage fell to 2.65% mortgages, the lowest in U.S. history. This creates a less affordable environment for home buyers and harms potential buyers’ abilities to acquire property.

First-time buyers are forced to either buy a home knowing they may not be able to afford it or continue renting until affordability rises. For those who already own a home, remaining in their current house instead of buying a new one has been increasing in popularity as well. (Sources: National Association of Realtors, Federal Reserve Bank of St. Louis, Freddie Mac)

How Deflation & Inflation Affect High Income & Low Income Earners – Inflation Review

As inflation has taken center stage over the past year, consumers among all demographics have been affected in various ways. Consumers know inflation as the overall increase in the cost of goods and services, from shoes to gasoline. However, products that are essential for everyday life can be more costly for some than others, such as food, healthcare, and toilet paper. These products usually make up a larger portion of expenses for lower-income consumers and less for higher-income earners. In essence, inflation can be much more of a challenge for lower-income earners as less disposable income is left for more desirable items.

Fortunately, consumers have the ability to control what they buy when inflation sets in, such as buying hamburgers instead of steak. This is where consumer choice is critical as to where the economy is heading and what companies might benefit more than others.

As the economy slows and lower prices eventually settle in, a deflationary environment evolves pulling certain asset prices down. Historically, lower asset prices affect higher income earners with assets, rather than those with little or no assets. Deflation may affect the prices of assets such as homes, cars, stocks, and commodities.(Sources: U.S. Bureau of Labor Statistics, OneBlueWindow Editorial Staff)