Your Money This Week

Economic Reports

This week we had three economic reports, the second of which got markets moving and investors thinking. 

The jobs report was strong, which is a good thing unless you’re worried about inflation. And we did get a hotter than expected CPI report on Wednesday, where for the second month in a row inflation was higher than the prior month. We’re at 3.5% now, up from 3.1% in January.

Shelter and energy prices drove the increase. Energy is volatile, and oil and gas prices are up. Shelter is where the fed is hoping to see improvement over the next few months. 

Stocks sold off a bit and rates went up, which meant bond prices came down.  

But when Thursday’s PPI report came in better than expected we saw a rebound in stocks and yields were essentially flat.

What does this mean for your money?

We’ve talked about inflation being sticky on the podcast, meaning it’s not going to go down in a straight line to the Fed’s arbitrary 2% target. There will be fits and starts. It’ll take time for the rate hikes to work. 

I’ve also shared that a risk to stocks this year was overly optimistic rate cut expectations. At one point the market was expecting six rate cuts starting in March, which seemed crazy. And that matters because what drives markets isn’t necessarily what’s happening, but how what’s happening differs from expectations. It’s like going to see that movie everyone raved about, but hating it because it was just okay. Or it was There Will Be Blood which was just awful without the weight of expectations. 

But now there’s increased concern that the perfect soft landing won’t happen. The Fed wants to cut rates to avoid damaging the economy, but a strong jobs market and sticky inflation are interfering. So we may be looking at rates staying higher for longer, which threatens the economy, or cutting rates too soon leading to higher inflation for longer. 

Both could cause choppiness and weakness in stocks, or the expectations can get too negative, the movie could turn out better than expected, and markets could rally.

It’s not worth it to play the macro guessing game with your portfolio. No one does it well. But hopefully it’s worth understanding the logic behind the recommendation to stay the course. 

Other quick hits

Mortgage rates aren’t budging. The 10-Year Treasury yield has increased, plus that 280 bps spread is wider than usual. We had an amazing guest last year explaining mortgage-backed securities and how mortgage rates are set if you’re interested in the detail (Mortgages, the Bond Market, and Mortgage-Backed Bonds), but eventually we should see rates get to the high 5’s or low 6’s.

If you’ve been waiting to move money from cash or short-term bonds into longer-term bonds you’re getting a better entry point now, but if rates continue to go up long-term bonds (maturity more than ten years out) will be hurt the most.

Used car prices are down, but auto insurance costs are way up. Home insurance is also a lot more expensive, but that’s not factored into CPI. When you get your renewal bill, make sure to connect with a good insurance broker and shop around to see what’s out there without cutting your protection just to save on costs.