Market Note – August 14, 2023

By Hightower Great Lakes on August 14, 2023

Inflation Retreating but Energy May be Leading Indicator

The annual rate of inflation, measured by CPI, inched higher in July after twelve consecutive months of lower inflation. Total CPI now stands at +3.2% y/y, and the often-cited Core CPI, which excludes volatile components, food and energy, rose 4.7% y/y in July.

Services components to inflation are also retreating but remain elevated relative to historical levels. We watch Services inflation as it represents 58% of CPI, and shelter represents 34% of CPI. Within CPI, rent of shelter costs have retreated for four consecutive months, but remain elevated at +7.8% y/y.

Chart 1: Inflation Falling but Services Components Still Elevated[1]

Importantly, while we are seeing progress on many inflation metrics by and large, commodities have reversed higher, with WTI crude prices now up 24% since the June lows. Stubborn inflation likely means the Fed will maintain its restrictive monetary policies. We continue to believe interest rates will remain higher for longer.

Chart 2: CPI Lower, Data-Dependent on Where it Goes From Here – Watching Energy[2]

Bear Steepening Yield Curve

The market is pricing in 100 bps in rate cuts for next year. Meanwhile, the longer end of the yield curve is rising. The U.S. 10-year Treasury yield, currently 4.2%, is the risk-free rate used to value all assets.

After 10 years of TINA (“There is No Alternative”) in the equity markets, higher yields are now an attractive alternative, which is one of the reasons equities have stalled out after a torrid rise in the first eight months of the year. In addition, higher rates challenge long duration assets, including growth stocks and technology in particular. 

Chart 3: Highest 10-Year Yield Since 2008[3]

Chart 4: Relative Price Performance Reflects Longer Duration Sensitivity to Rates[4]

Government Interest Payments are Getting Heavier

Coinciding with the Fitch U.S. credit downgrade, the sustainability of government operations under its current deficit-running program is being called into question. Higher interest rates challenge its ability to pay debt while maintaining necessary funding for Medicare and social security, which is supported by issuing new debt.

Since the government extended its debt ceiling, it has issued more than $1 trillion of securities. An increase in new debt sales at higher interest rates is mounting over the Treasury and the Fed, while net interest costs approach a dangerous 3%.

China Global Risk

China’s growth has been slow since its post-pandemic reopening. China reported some positive retail sales and industrial production data, which supports U.S. companies operating in the country, but overall growth is well-below pre-pandemic averages, strained by diminished property market activity and deflation.

Real estate, a large part of the Chinese economy, continues to meet headwinds with developer default risk and lower housing sales. China maintains a conservative +5% annual GDP growth projection.

Adding pressure, the Biden administration recently instituted investment restrictions, aimed at China, that further limit U.S. investment in China’s AI and technology sector. The restrictions curb U.S. fund investments in Chinese tech companies, which the U.S. government suspects ends up supporting Chinese national military programs.

While the People’s Bank of China has kept its interest rate at 2.65%, we expect more accommodation will likely occur. In the meantime, the Chinese consumer remains in a strong position after three years of lockdowns.  We are seeing solid results from gaming and luxury retail companies. 

Consumer Stays Resilient While Facing Higher Prices

Following the theme of companies continuing to raise price and exhibit pricing power, Disney (DIS) announced last week its plans to raise the price of its streaming platforms. The price of Disney+ and Hulu will increase more than 20% each.

Wynn Resorts (WYNN) beat its earnings expectations on the back of favorable tourism trends and consumer spending. Particularly, its locations in Macau (China) are experiencing an accelerating recovery. We heard the same from Las Vegas Sands (LVS) and Starbuck’s (SBUX) a few weeks ago during their earnings releases. 

The consumer remains resilient. And while there are overhangs, which include the re-establishment of student loan payments and a potential cutback in the Suplemental Nutrition Assistance Program (SNAP), the job market remains very healthy with higher wages. 

The Week Ahead

Earnings – Tuesday: HD. Wednesday: TGT, TJX, CSCO. Thursday: WMT. Friday: EL, DE, PANW.

Economics – Tuesday: Retail Sales (July). Wednesday: Housing Starts (July), Industrial/Manufacturing Production (July), FOMC Minutes (July). Thursday: Philadelphia Fed Index (August).

Return for Selected Indices^[5]

Click here to read last week’s Weekly Wisdom (8/10).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of August 14, 2023.

[2] Source: FactSet (chart). As of August 14, 2023.

[3] Source: FactSet (chart). As of August 14, 2023.

[4] Source: FactSet (chart). As of August 14, 2023.

[5] Source: Bloomberg. As of August 6, 2023.