Hope all is well with you. It was another volatile week. The focus was a key U.S. Federal Reserve meeting and the continued concerns about bank stability. The major U.S. stock indexes recorded gains of 1% to 2%. Despite the overall rise, markets were unsettled, shifting quickly between gains and losses. The Girl Scouts were in the news this week after taking orders for and not being able to supply their limited edition Raspberry Rally cookies. I have broken down this week’s update using different types of Girl Scout cookies.
The U.S. Federal Reserve to nobody’s surprise raised rates and other central banks tagged along. The Fed went up a quarter of a percent. The move extended its run of rate hiking and came amid continued instability in segments of the banking sector. As in the United States, central banks in the United Kingdom, Switzerland, and Norway all lifted interest rates in the latest week. The U.K. continues to deal with out of control inflation. Inflation in the U.K. rose unexpectedly to a 10.4% annual rate in February. The Bank of England, like the Fed, lifted its key rate by a quarter of a percentage point. Markets currently forecast no further rate hikes, and are pricing in an expectation that the Fed will start cutting rates as early as the July meeting. What’s really crazy is that there are now four rate cuts priced in for 2023, which would bring the fed funds rate to around 4.0%. I continue to believe the markets are NOT listening very well. The Fed said just this week they see a pause at 5.1% which would imply one more rate hike. The Fed is nearing the end of its tightening cycle, perhaps with maybe one or two more hikes remaining. However, rate cuts like eating just one Tagalong is extraordinarily unlikely. Inflation is elevated and the labor market remains tight. The Fed has a dual mandate of price stability and full employment. As long as the labor market remains in good shape they are going to keep trying to get inflation down to its 2 percent target and rate cuts won’t happen until either the labor market deteriorates meaningfully or we reach their inflation target.
Thin Mints are always a safe choice when ordering Girl Scout cookies. With the banking sector under pressure, money is flowing into safe predictable treasuries and treasury yields are getting thin. The markets continue to believe interest rates are headed lower long term. Yields of U.S. government bonds fell for the third week in a row, extending a recent run of fixed-income volatility amid shifting interest-rate expectations. The yield of the 10-year Treasury bond slipped to 3.38% on Friday, down from a recent peak of 4.07% on March 2. The 2-year note’s yield was around 3.77%, down from 5.07% on March 8. Yields will eventually stabilize as the banking concerns subside , The peak in yields might be behind us. Nonetheless, I expect more money will continue to gravitate toward short-term investments like CDs or short-term Treasury bills, as yields remain attractive.
Gold is having a serious rally. Unfortunately, like the Raspberry Rally while gold is currently generating a lot of buzz it will likely disappoint. Like those who ordered Raspberry Rally cookies that didn’t arrive, investing in gold now will not give you the delicious returns you are expecting. Gold only does well in times of instability and panic. Which we have had the past couple of weeks. The question is will this panic persist and I don’t think it will. Gold eclipsed $2,000 per ounce which is the highest price since August 2020, and only about 10% higher than where it was in 2011 and 2012 and that in large part is thanks to a 9% move higher since March 8th. Gold goes up in short bursts then is down or sideways for long stretches of time. Don’t get sucked in by this latest move in gold. It is not a solid long term investment.
The decade long rally in home prices is toast. A private report this week showed that U.S. home prices posted the first year-over-year decline in 11 years in February. The National Association of Realtors said that the median existing home sale price fell 0.2% from a year earlier to $363,000. For those of you who cashed out and sold your homes with the hope of buying back later at lower prices, your vision may finally be coming to fruition.