Daily Commentary

MarketMinder’s View: This piece, which we find overall a bit mixed, explores the question of how US GDP has not only continued growing, but even accelerated at times despite Fed rate hikes. The framing veers into sociology, which we are always wary of in this context and encourage investors to tune out—as markets do. But the observations about housing in particular are keen, even if they tacitly buy into the concept of the wealth effect (where people allegedly spend more when they feel wealthier). Housing is one of the main places Fed rate hikes have had a direct economic impact by affecting both supply and demand. The demand side is probably obvious: Higher mortgage rates curbed buying power. The supply side is probably less so: “About 60 percent of homeowners with mortgages have rates below 4 percent, based on a Redfin analysis of government data. That’s because many locked in low borrowing costs when the Fed cut rates to rock bottom during the 2008 recession or at the onset of the 2020 pandemic. Many of those homeowners are avoiding moving.” With supply of existing homes for sale low and lower demand curbing construction for a spell, overall home supply tightened, elevating prices. But now this is turning, thanks to a pickup in residential investment, turning a modest economic headwind into a tailwind. As for the rest of the argument here, yes, household finances are in good shape, and that helps. But we think the economic benefits are less about total wealth and more about disposable incomes rising as wages catch up with consumer prices, helping restore purchasing power. Meanwhile, businesses remain able to invest thanks to their having broad financing avenues beyond bank loans. They can access capital at costs below where the Fed is trying to peg them, which is helping them take a more offensive posture. So in short, we think the main lesson here is that Fed rates just aren’t all that important on their own—not that things are somehow different this time.

MarketMinder’s View: This piece does juuuuuust a little bit of overthinking China’s recent gold buying, which data from the World Gold Council imply brings its physical gold reserves to about $170 billion. The article argues this is China’s way of protecting itself from US sanctions if and when it invades Taiwan, and numerous analysts quoted herein seem to agree. While war and geopolitics aren’t market functions, we think this is all entirely too speculative. We don’t doubt Russia’s losing access to its foreign exchange reserves was an object lesson to countries worldwide and an incentive to diversify. But $170 billion is a pittance for China. The World Bank estimates its GDP at $10.5 trillion in current US dollars. Meanwhile, Bloomberg reports China’s foreign exchange reserves at just over $3.2 trillion, which is in line with the norm in recent years. While we have seen all the same rumblings and jawboning cited in the article, there are numerous reasons China could be buying more gold, many of them economic and related to officials’ concerns about the currency’s stability in the here and now. Ignoring these and focusing on geopolitical speculation seems mostly about sentiment and the heightened attention on war in general right now. Hammer looking for a nail and all that, in our view.

MarketMinder’s View: We are always a tad wary of data like this, as the British Retail Consortium’s sampling and methodology differ from the Office for National Statistics, which computes official UK inflation readings. But real-time data are still helpful, so it is worth noting that its measures show prices for non-food goods fell -0.6% y/y in April. That is consistent with the disinflationary and deflationary trends we have seen in goods throughout much of the developed world. And coupled with the decrease to the household energy price cap, it augurs well for continued inflation improvement in the UK. But! Goods are just one part of the inflation basket, and this report doesn’t capture services, which matter a great deal. So it is noteworthy but not all-encompassing.