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Waiting on PCE and Fed Yakkers

We are waiting on the Personal Consumption Expenditures (PCE) inflation data–this could be a huge market mover today–either up or down.

Then after PCE we have at least 5 Fed yakkers who could pile on to the data in a hawkish way–most of their speak lately has been hawkish so we will see if the PCE data gives them reason to ‘pile on’. Actually ‘hawk’ Loretta Mester already was interviewed on CNBC this morning and she reiterated her hawkish views–but also claims she is data dependent.

It’s boring–but I continue to watch. I guess boring is preferred to doing something stupid which I have the ability to do. Honestly given my outlook on interest rates I can see doing darned little for the next month. The next FOMC meeting doesn’t occur until March 20/21 and with lots of data between now and then, but we will have a fair idea of the rate hike for March based on CPI, PCE and employment data that we see in the next 3-4 weeks.

Buckle up–with equities down about 1/2% this morning we’ll see if the data reverses the move lower OR if the data sends stocks much lower. The 10 year is at 3.92% and strong PCE data will send the rate over 4%.

30 thoughts on “Waiting on PCE and Fed Yakkers”

  1. Risk/reward for perpetual preferred stock is very weak in my view with multi-year CDs yielding 5% and investment grade bonds available at 7%+ for 5 to 7 year maturities. I am loading up on a investment grade BDC bonds with YTMs of around 7% or higher, such as Main Street and Owl Rock.

  2. Question: If the SPX drops to 3300 (16.5%), will preferreds likely fall, on average, that much or more? Is this time different, or have we been to this rodeo before?

    1. They would probably fall with the tide but not the same amount. They are more sensitive to interest rates, that’s an important factor. A change in bakruptcy risk also matters. Those with high leverage and higher than average risk won’r do well in a downturn. Too many factors to predict the exact amount.

    2. Preferred stocks are linked primarily with interest rates so they would tend to fall less than the market unless there’s a huge increase in rates.

      The majority of the issues I follow are NYSE financials and they’ll fall more than the market if there is another financial crisis such as 2008 when many fell 50-60-70-80%.

  3. Equities markets are slowly repricing in the the reality that inflation is declining mush slower than they wanted. However, many still believe that inflation will fall faster (aka a soft landing) than the Feds expect.

    Just a mater of time ( months) and markets will realize a recession is immenient, and the headlines will read …..recession, market bottoms, capitulation, buy the dip, big money is made on the turns, dont panic, good time to buy, multiples…

    1. Windy good example is the CTO
      The common has dropped today after yesterday earnings release. It’s down over 7% while the preferred off only 1%
      Even so, I cancelled my low ball limit order before market open as I wasn’t sure I wanted it if it did hit

      1. Aren’t we over due for credit spreads to hurt preferred prices? I note that this week junk funds have experienced large outflows. If the credit spreads for junk bonds widen, shouldn’t preferred spreads widen? (Issuers of preferred are not necessarily junk issuers but a credit spread is just another form of spread for risk that should go in the same direction?)

        1. > Aren’t we over due for credit spreads to hurt preferred prices?

          I think so, yeah. Preferreds have been holding up too well in light of what’s going on with (for example) ten year t-bonds.

          1. Preferreds will follow long end bonds lower in time if or when credit spreads widen. But Im still getting ripped off on bonds I want to buy. I bought an IG 2035 last fall at 6.7%. It dropped to around 5%, then yesterday I saw 5.8% and thought I need to watch it again. Then an hour later it was 5.4% and never traded..WTH? Pure ripoff.
            As Martin said it all depends. You bought an IG low yielding perpetual at beginning of last year and it got excoriated like a Pendragon. If you bought a live floater like say NSS, it was profitable for the year. That is a huge variance so you cant lump them all together. But as a cynical very very general overview observation perpetual preferreds can be the worst of both worlds. Act like stocks when they crater, and act like a bond when they blow out.

            1. Grid, wish I could snag some IG bonds too, but I still think my theory that people got such great deals last year in the June Market swoon and the Oct. drop that they haven’t seen returns on them this good in a long time are holding on to them and not selling. I think as rates go higher you might see trading in lower coupon bonds as people switch over within IG that now have higher returns as prices have dropped. Several people here have mentioned this already, that a 3 or 4% is starting to creep up to 5-1/2% with the face value dropping.
              I think though we might start to see new bonds coming out with higher coupons as companies have to rollover debt coming due. A lot of companies were not paying down debt. I guess they thought rates would be lower for longer and they could just refinance old debt with new at the same rate.
              Again, there has been comments here about why would a company issue a new bond to pay off a old one about the same rate? Because they want to extend the debt farther out than the old bond.
              With new IG bonds, your not going to get the discount off face value like the older ones but you get to lock in a higher return on a 20yr bond.
              Doesn’t mean much to me at my age, but if I had been a conservative investor when I was in my 20’s in the early 80’s knowing what I know now I might of done it.

          2. O. Chongusu….Charting the spread between TLT and PFF over the last year, the spread is as wide as it has been (~16% with PFF outperforming), but it has not changed all that much since October. The spread did narrow to ~8% briefly in December. A five year chart shows a completely different picture, with TLT outperforming PFF by ~50% at the height of the pandemic induced sell-off compared to late 2018, or now for that matter, so yes, credit spreads could be a preferred stock price killer!

  4. With the two year over 4.8% and the ten year approaching 4.0%, would it maybe be a good time to start noticing that the CBO projects a $20 T increase in the debt in the next ten years? We have a bi-partisan spending problem. Have you seen the recent articles that conclude that tax increases alone will not meet the deficits.


      Government solutions to a massive debt problem:

      National VAT TAX
      100 year treasuries
      CBDC (total control of the money supply) Near 100% tax collection.
      Means testing for all entitlements / subsidies
      Much higher tax rates

      Cut government spending, never.

          1. You couldn’t have said it any better Eladio. They all want to satisfy their voters with no regards to the eventual repercussions.

            1. Oddly, states end up with much more pragmatic discussions when it comes to spending and budgets.

              Thankfully they cannot run deficits.

            2. ChuckP…Yes, they all want to satisfy their voters, but is it just to make them happy? I suspect the motivation is self-serving in that it is a way to keep their jobs. A simple solution exists to help mitigate the problem, but it is seldom discussed: Term Limits. Saw an interview with Bowles-Simpson a few years ago, both final termers by choice, one from each party and they revealed that members of both parties came to them and asked them to “save us from ourselves.” They knew their actions had repercussions that were ultimately bad for the country. With term limits, the idealism that many have initially can manifest itself in the first term,. If they knew they could do what’s best for the country without fear of job loss on their second, and mandated, last term, I feel the nation would be better off.

              1. Lucky; You are 100% correct. I suspect that you know that topic has been brought up for well over 25+ years now. Once they get in & find out about all the Incredible benies, payoffs, & rewards on top of their salaries you can’t get them back out. I can give you dozens & dozens of examples starting right in the WH. But it goes on way beyond that.

      1. Much higher tax rates for some people, for example billionaires paying nothing or $750/year is another solution. A 0.1% tax on stock and bond transactions would also generate a lot of revenue, and day traders and hedge fund operators are in a better position to pay than most of us. A cap on basis step-up on death (say 10 million$) would also raise a lot of tax revenue to pay for defense and infrastructure. Cutting expenditures, especially waste, is better yet, but no one wants to step up to say cut veteran benefits, defense spending, cancer research, road building, or close the National Parks etc. For good reasons.

        1. Jim M – a tax on all share transactions would just kill off the US exchanges as transactions moved elsewhere (Canada? Europe?), so it wouldn’t really raise any money. It would just cost us thousands of jobs – IMHO.

          A tax on transactions that aren’t held for more than a few seconds might be interesting. It would kill off a lot of the algorithmic traders, which might actually make the markets more stable. Probably has little chance of passage because there is a lot of money being made in flash trading and politicians are so easily (and relatively cheaply) bought.

          1. Private…A tax on very short hold transactions might take the profit away from arb trades with tiny spreads, thus making payment for order flow, and subsequently, no commission trades, no longer feasible.

        2. You’re on an investment site with people who make frequent trades and you’re advocating for tax on trades? Good luck with that.

      2. Add to this that our intelligentsia have embraced Modern Monetary Theory (MMT). MMT unfortunately aligns well with politician’s self interest to spend fragrantly, so it’s understandably popular in DC. Most pols don’t understand it but believe it means there are no restraints on Government spending. This allows them to easily rationalize acting in their near term interests.

        Just an observation. Congress controls Fiscal Policy and the Fed implements Monetary policy. Currently Fiscal policy is not part of the fight against inflation, and seems oblivious to having any role in it.

        Disclaimer. I don’t know if MMT is a good theory or not.

      3. Although Congress is now famous for not getting things done, this is a rare example of that happening will actually cause taxes to go up. Some may have forgotten the Trump tax cuts have a 2025 expiration date to it. So if no action occurs within 2 years, taxes will be going up and returning to pre 2018 levels.

  5. Services less housing is up .6% and wages are up .9% for the month. To this groundhog, it looks like another six months of wintery rate hikes?

    1. One of my California State bond got called. I finally bought 10K of US T bond. I also bought San Francisco Bay Area Rapid Transit. Slightly below par. Rated AAA by Moody. CUSIP 797661ZX6
      I was told by Vanguard Brokerage bond folks that I could have to pay the bond discounted. Fidelity has the shorter duration on SF BART trading slightly above par.

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