The Week in Charts (10/15/23)

By Charlie Bilello

15 Oct 2023

View the video of this post on YouTube here.


Note: I’m doing a big live webinar with YCharts this week (10/18 @ 2pm EST) on 10 Charts Every Investor Should Know. Register Here, open to all.


The most important charts and themes in markets and investing

1) How Long Will Inflation Remain Elevated?

The overall US inflation rate moved up to 3.7% in September, the third increase in as many months. How long will the inflation rate remain elevated, above the Fed’s 2% long-term target? That’s the big question among market participants.

While the overall rate has been moving higher, we saw a continued positive trend in core inflation (excluding food/energy), which moved down to 4.1% in September. That was the smallest increase since September 2021.

Why is the overall rate rising while core prices are still moving down?

The spike in Energy prices, with Gasoline/Fuel Oil surging 12.9%/18.4% over the last two months.

Energy had been major tailwind that helped push overall CPI down to 3% in June, but the YoY rate-of-change turned positive in September for Gasoline (+3.0%) and was much less negative for Fuel Oil (-5.1%).

The good news is that nearly everything else has seen a continued decline in price increases since June. Among these, the best news has come from the “Food at Home” category, which moved down sharply to 2.4%. This is the lowest rate of food inflation we’ve seen since June 2021, and down from a peak of 13.5% last year.

CPI’s largest component (Shelter) declined for the 6th straight month, moving down to 7.2%. Given its long lag versus real-time data (listed rents are down 1.2% over the past year), a continued move lower is expected in the coming months. This, in turn, should lead to a continued decline in core inflation.

2) Bond Market Is Doing the Fed’s Job

A number of Fed officials have commented on the move higher in yields of late, particularly at the long end of the curve. Last week, Dallas Fed President Lorie Logan (voting FOMC member) said that if these long-term rates remain elevated “there may be less of a need to raise the Fed Funds Rate.”

A few examples of how higher rates are translating into higher borrowing costs:

  • The 30-Year Mortgage Rate in the US has moved up to 7.57%, the highest level since December 2000.
  • The average interest rate on 48-month new car loans in the US has moved up to 8.30%. That’s the highest we’ve seen since 2001.
  • The average interest rate on US credit card balances has moved up to 21.2%. With data going back to 1994, that’s the highest rate we’ve ever seen.

These higher interest rates have curtailed demand, most notably in the housing market but in many other areas that depend on financing as well. While the Fed had been projecting one more rate hike before year-end, that may no longer be necessary, and indeed the market is saying as much. For the November FOMC meeting, there is an over 90% probability of another pause.

And looking out further, the market is saying the Fed’s next move will not be a rate hike but instead a rate cut. That’s forecasted to occur in June 2024, but of course a lot can change between now and then. For now, bringing down inflation remains the goal, and the Fed seems determined to keep rates “higher for longer” to accomplish that objective.

3) Boomer Spending Boom

US consumer credit increased 4% over the last year, the slowest growth rate since May 2021. In August, we actually saw total credit balances decline 0.31%, the largest monthly drop since May 2020.

While many consumers are starting to pull back, the Baby Boomer generation is spending more than ever before. Americans aged 65 and other now make up a record 22% of overall spending, up from 15% in 2010. This is far in excess of their share of the overall population (16.8%).

US consumers older than 60 reported spending 7.9% more than a year ago versus a 5.1% increase among those age 40 to 60 and a 4.6% increase for younger consumers.

Why are they spending more? Because they are comparatively much better off than subsequent generations, having purchased their homes before the twin housing bubbles and with a balance sheet that actually benefits from rising rates (higher interest income on cash balances, no floating rate debt).

A record 26% of household wealth is now held by Americans that are 70 years and older.

4) Banks Still Under Pressure

The KBW Bank Index is underperforming the S&P 500 by 37% year-to-date, on pace for the widest annual gap on record (note: data via Dow Jones going back to 1993).

The sharp move higher in interest rates has been particularly painful for the balance sheet assets of regional banks (see Silicon Valley Bank). These same banks are also facing rising delinquencies in auto/credit card loans and have considerable exposure to the downturn in commercial real estate.

Within the troubled office sector, it’s not just San Francisco that’s having problems.

The office vacancy rates in Houston (26.4%), Dallas (25.8%), and Austin (24.2%) are among the highest in the country, well above the national average (19.2%).

This is the consequence of many years of overbuilding and the transition to remote work.

5) The Bill Is Coming Due

The US has already issued $1.76 trillion in net Treasury securities through September, on pace for over $2 trillion by year-end. This will trail only 2020 for the largest net debt issuance of any year in history.

Rising debt and rising interest rates is a troubling combination, and the bill is starting to come due.

The Interest Expense on US Public Debt rose to $883 billion over the past year, another record high. If it continues to increase at the current pace it will soon be the largest line item in the Federal budget, surpassing Social Security.

6) Cry for Argentina

Argentina’s central bank hiked interest rates by another 1,500 bps to 133% this week. That number by itself is unfathomable, but even more unbelievable is that it’s actually below their reported inflation rate of 138%.

A century ago, Argentina was one of the richest countries in the world. Today, after decades of money printing, deficit spending, political instability, and failed socialist policies it has hyperinflation and nearly 40% of the population living in poverty.

Their currency (Argentine Peso) is being devalued so quickly that workers are in a race against time the moment they are paid, rushing to either spend it or covert it to dollars.

Hopefully, the upcoming presidential election (October 22) will finally lead to positive change. The leading candidate according to most polls, Javier Milei (a libertarian economist), is calling for the abolishing the central bank, dollarizing the economy, privatizing state-owned enterprises, and reducing regulations on business.

7) Back on the Path to Prosperity

The last three years have been extremely difficult for many Americans, with price increases in the most important areas (food, energy, housing) outpacing wages by a considerable margin.

But recently, this trend has reversed, with wages now outpacing inflation on a YoY basis for five straight months. This is a great sign for the American worker that hopefully continues.

8) A Few Interesting Stats

a) Over the last 3 years, the MSCI India ETF ($INDA) has gained 33% while the MSCI China ETF ($MCHI) has declined 41%.

b) The Fed’s balance sheet has been reduced by $599 billion so far this year, on pace to set a new record for a calendar year (prior record was -$373 billion in 2018).

c) Private Credit debt has increased 278% since 2010 vs. a 180% increase in Bank Loan debt and 57% increase High-yield Bond debt. AUM in private credit funds has more than doubled (to $1.47 trillion) since 2018.

d) Margin debt balances have declined 26% from their 2021 highs to $689 billion (source: Finra).

d) Led by steep price cuts from Tesla, the average selling price for EVs has declined 22% over the past year, moving from $65,000 down to $50,683 (Cox Automotive). That’s now only 6% higher than the average selling price for all vehicles ($47,899).

And that’s it for this week. Have a great week!


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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosures here.

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