“Trees don’t grow to the sky.”
-German Proverb
Here’s what you need to know this week:
· Spiking bond yields give investors the jitters
· Oil prices and tariffs threaten more inflation as the midterms approach
New Office
Quick reminder, we’re moving! Our new office is located about one mile from our current office:
Our old office is circled in red and the new office is circled in green. Our new address will be 3817 NW Expressway Ste 1030; again, we will not be moving until October, but we wanted to let everyone know about the beginning of this exciting new chapter!
Brooding Bond Market
Stocks ended their five-week winning streak last week due to a prolonged selloff in bonds. When bond prices decline, bond yields increase, and bonds can selloff for a number of reasons: rising inflation, rising interest rates and declining confidence in the dollar, just to name a few. Right now 30-year US Treasury bond yields are at their highest point since 2007:
This matters for a few reasons. First, this number reflects the rate at which the US government will have to issue any new 30-year debt, meaning that the US will spend more of the national budget on interest expense. The US national debt just passed $40 trillion for the first time and spiking yields raise concern over the US being able to pay its debts without printing so much new money that it spikes inflation, creating an inflationary spiral. Higher Treasury yields also mean higher borrowing costs for corporations, a condition that generally drives stocks lower. Lastly, rising yields are often a sign that investors expect inflation to rise which will prompt the Federal Reserve to raise interest rates.
Treasury Secretary Scott Bessent is clearly aware of the issue and committed the Treasury to $4 billion in T-bond purchases in an attempt to backstop prices[1]. Markets were initially ameliorated by the announcement but the mood quickly soured and sent yields back to their highs within a day. Legendary investor and Bessent’s former mentor Stanley Druckenmiller called the move misguided and likened the move to putting a band-aid on a more serious wound[2].
Inflation in Focus
The Federal Reserve holds their next meeting to determine interest rate policy three weeks from today (September 16th) and investors are divided on what to expect. Currently the bond market is pricing in a 40% chance of a 25 basis point (0.25%) interest rate hike at the meeting, and a 60% chance of keeping rates flat[3]. However, much can happen between now and then that may influence the Fed’s decision.
First is the price of oil. Everyone is aware that the Iran War has driven oil prices higher; however, the Trump administration has been releasing oil from the US Strategic Petroleum Reserve (SPR) to keep a lid on gasoline prices for US consumers. This latest bout of selling has driven the SPR to a historic low:
This means that the US government has limited ammunition on keeping gas prices suppressed and will also need to refill the SPR at some point. Additionally, President Trump has reignited the trade war with Canada, threatening more than $20 billion in new tariffs. Canadian Prime Minister Mark Carney countered with a threat of $20 billion in retaliatory tariffs on the US while imploring other nations to join him.
Rising oil prices and new tariffs have been the main drivers of inflation over the last eighteen months and both are threatening to drive inflation even higher, potentially forcing the Federal Reserve’s hand on raising interest rates. Later this morning we will receive the Personal Consumption Expenditures (PCE) report for the month of July and analysts expect the report to show monthly inflation at -0.1% and annualized inflation at 3.7%[4]. A light report would likely calm investor nerves in the short term, while a hotter-than-expected reported could add to the already turbulent bond market’s woes. All of this comes with the backdrop of the midterm elections just nine weeks away; with so many market catalysts at once, stocks may be volatile as we head closer to November.
What Else
· The Supreme Court allowed President Trump’s ballroom to continue construction while they consider the case
· Tesla will unveil their self-driving Cybercab in Austin next Thursday, September 3rd
· A fast-moving wildfire in Nevada has prompted the evacuation of thousands of citizens as firefighters work to contain the blaze
· US negotiators hosted peace talks between Israel and Syria in an attempt to ease tensions between the two countries
· Russia struck cargo ships in the Black Sea, the latest escalation in their war with Ukraine
What We’re Reading
Country music legend Dolly Parton passed away yesterday at the age of 80. Parton wore many hats in her career: musician, actress, entrepreneur, mogul and philanthropist. Parton was known for her relentless cheer and optimism and was an inspiration to millions. Click below to read more about her incredible life:
What’s Happening Downtown
Ten Buck Lunch Week continues in Midtown through Friday the 28th. This event features $10 lunch deals from 11 AM to 2 PM from dozens of participating Midtown restaurants. Click below for a full list of restaurants and their $10 meals:
To read more from our blog, click here
Written by: Kane Ogle, CFP®
Steve Beck, Kane Ogle, CFP®, Amber Eduvigen, CFP®, Cale Olbert, CFP®, Brett Valentine, CFP®, Brandon Ingerson, Bill Daniel, Sam Postich, Jenni Hess, Hannah Hartman