April 3, 2024

 Commentary

Stock bulls continue to struggle amid worries that sticky inflation will keep interest rates higher for longer. There are even more alarms being raised about another inflation surge as the ongoing Russia-Ukraine war and increased tensions in the Middle East continue to push benchmark crude prices higher.

Both Brent and WTI futures are now trading above $85, which is the first time since October that WTI prices have managed to top that level. Traders yesterday were jolted by a Ukraine attack on a major Russian oil refinery, though no critical damage was reported. However, that does follow an attack on Iran’s embassy in Damascus, Syria, on Monday which drew retaliation threats from Iran.

Some military experts warn that Israel and Iran are now closer to a direct military clash than they have been since 2018 when the two sides fought a series of short battles in Syria. However, most seem to think it’s unlikely that Iran will directly attack Israel as they don’t want to risk a military conflict with the US. Instead, they anticipate an increase in low-level attacks by Iranian proxies.

Either way, both situations seem incredibly fragile, and feed worries that a chunk of global oil supplies could get knocked out by some unforeseen military strike at a time when traders are already concerned that world oil supplies face a deficit this year.

It’s possible that oil prices start to back off if Iran’s threats remain just threats and the incident fades from the headlines. Bulls right now find themselves kind of in a data void with nothing new to counter the renewed inflation worries.

There are hopes that Fed Chair Jerome Powell might throw the bulls a bone today during a speech on the outlook for the US economy. Ideally, bulls would like for

Powell to concentrate more on a rosy outlook for the economy and downplay lingering inflation.

Bulls are also hoping that March jobs data on Friday can restore faith that the “disinflation” trend is still in tact. ADP’s private payroll report today provides a preview of what to expect from the “official” report. Wall Street is expecting ADP to report a gain of +150,000 jobs, versus expectations for the government to show a gain of around +200,000.

Investors today will also be digesting March PMI and the ISM Services Index.

On the earnings front, Levi Strauss is the only US company of note. 

Inflation Concerns Remain, Putting a 5% 10-Year Treasury Yield on the Map: After months of range-bound trading, the benchmark 10-year Treasury yield appears to be settling into a pattern similar to what was seen last October, when the rate soared to its highest level since 2007 and briefly burst through 5%. An aggressive selloff of long-dated U.S. government debt, triggered by Monday’s manufacturing-related reading from the Institute for Supply Management, continued for a second session on Tuesday, spreading across assets and around the globe. The 10-year rate, used as a benchmark for everything from student debt to auto loans and mortgages, jumped to roughly 4.37% and headed for its highest level since November. Yields as far away as Asia, Australia, New Zealand and Europe climbed in unison. A so-called reflation trade, triggered by signs of persistent U.S. inflation, gripped financial markets, prompting investors to sell off stocks and government debt in tandem, sending oil briefly above $85 a barrel for the first time since October, and sparking a rally in gold and silver. The U.S. Dollar Index DXY also touched a 4.5-month high.  Source Market Watch

Wall of Commercial Property Debt Coming Due:  Banks will have to cut their exposure to commercial real estate because of a $2tn “wall” of property debt coming due in the next three years, according to a leading US brokerage. Newmark, a real estate advisory and brokerage company, said the estimated $2tn of US commercial real estate debt maturing between this year and 2026 would have to be refinanced at much higher interest rates. According to US Mortgage Bankers Association data provided by Newmark, $929bn of commercial real estate debt will need to be repaid or refinanced this year alone. The company estimates that $670bn of the loans maturing by 2026 are “potentially troubled”. Real estate investors have been hit by rising interest rates, which have increased their financing costs and pushed down property values.  Source Financial Times

Interesting Data + Tonights Powerball is Over +$1.0 Billion!  Americans spent over +$113 billion on lottery tickets last year, more than they spent on movies, books, concerts and sports tickets - combined! Yes, Americans love to gamble on the big prizes. For lotteries, this is our second consecutive week of being able to offer players an advertised jackpot over +$1 billion. Tonights prize ranks as the fourth-largest Powerball jackpot and ninth-largest U.S. lottery jackpot. If a player wins the jackpot in Wednesday’s drawing, they will have the choice between an annuitized prize worth an estimated $1.09 billion or a lump sum payment estimated at $527.3 million. Both prize options are before taxes. If the winner selects the annuity option, they will receive one immediate payment followed by 29 annual payments that increase by 5-percent each year. Best of Luck! 

What It Costs to Upgrade to a Nicer Home: The spring housing market is defying expectations that prices would cool and competition would ease. Higher mortgage rates usually cool both prices and demand, as they did last year, but that’s not the case now. There are still too few homes for sale because current homeowners can’t afford to move, and it’s keeping prices high. Home prices in February were 5.5% higher than they were in February of last year, according to CoreLogic. That annual comparison is shrinking slightly, but the price gain from January to February was nearly twice what it normally is for that time of year, suggesting this spring’s market started out strong despite higher interest rates. In the 22 years before the Federal Reserve started raising rates in 2022, upgrading to a 25% more expensive home would have increased the average homeowner’s monthly payment of principal and interest by 40%, or about $400 on average, according to data from ICE Mortgage Technology. In stark contrast today, the average homeowner with a near record-low mortgage rate would see their monthly payment shoot up 132%, or roughly $1,800, in order to move up to a 25% more expensive home. Buying the same home they’re in now would increase their monthly payment by 60%, according to ICE. The vast majority of borrowers today, 88.5%, have mortgages with rates below 6%, according to Redfin. Roughly 59% have rates below 4%, and close to 23% of homeowners have rates below 3%.  Source CNBC

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