Category Archives: FOMC

Signs of a less aggressive FOMC/Jerome Powell ? …  First time in a long time less happy to see the longest daylight day of the year pass …   Summer Friday heading into Fourth of July …

Mid this week FOMC chair Jerome Powell in front of a legislative public speaking event, for the first time mentioned that the FOMC could not decrease oil prices and food prices via faster interest rate hikes.

OK, we may take issue with this slightly because if they beat demand down enough, it will most certainly put headwinds to higher prices of both of these assets. However more importantly, this was possibly the first sign of a less aggressive FOMC, again shared by Jerome Powell.

Instantaneously capital markets took notice of the comments with a much happier tone as did interest rates with an extremely happier tone as well…

Interestingly, and speaking out loud to everyone our thoughts, just two weeks ago, a much harsher tone was voiced by Powell …given that fact, it’s way too soon to say the FOMC has taken their foot off the brake a little bit ….. Heck we still have a lot of economic data to get through for the next few quarters… some of which may be very hot and could have the federal reserve reverse course once again… but maybe it is a start..

We will be watching, but wanted to let you know a possible interesting breadcrumb that occurred this week.

Hot Hot Hot

With an unusually, extremely, hot summer shaping up here in the south, breaking hundred degree days by the week, we wave goodbye to the longest day of the year with less sorrow this year and a  bit of trepidation on what August … the seasonally hottest month of the year may bring.

Kvale front yard, watered daily !

Still better than ice and snow that no one here, present party included, knows how to drive on!

Today is a Friday, getting near Fourth of July midpoint of the year, enjoy your day and your weekend, and if you’re near us, stay hydrated and be careful out there!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

CPI (Consumer Price Index) – Inflation Measure Holds High — FOMC (Federal Open Market Committee) Green Light for Continued Tightening …

Last Friday, June 10, 2022 the BLS (Bureau Of Labor Statistics) released their monthly data on the CPI (Consumer Price Index – Great Analysis Link Here) Most blunt measure of inflation — Ok lots of abbreviations but stick with us for the main takeaways…

For the record we called a possible top here, and while the increase of the CPI was only .4% than the prior month, it was NOT a deceleration YET…

Bottom Line Result

Cutting to the chase for those with little time – This hotter report will give the FOMC (Federal Open Market Committee) led by Jerome Powell a green light for further tightening faster – creating a faster slowing of the economy…

Quick FOMC Fed Funds Analysis – The Rate Increase Measure

(Take note once again, the first rate hikes on far left of chart took three years…. the next rate hike cycle ..one in middle right, took almost FOUR years… this one MAY be literally months… again this fits our thesis of headwinds came fast and are behind us (Look Forward not Back)– had to put that plug in while we were on the topic…)

CPI Analysis – What’s the Hold Up

With Owners Equivalent Rent/shelter being a very large portion of the CPI component…. its fast turn around is holding the CPI Up along with food inflation as well….

Note that far right movement up….

Oh and oil prices moving higher did not help either…..

Bottom line, continued FOMC rate increases, faster slowing of the economy, eventually… lower interest rates faster …..

Sorry for the heavy Monday, but wanted to get it out there to you guys as it helps us clarify as well!

Have a Great ” Sticky CPI Explained” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

Update on Interest Rates … Have they Peaked? A Review of the 10 Year Treasury …

The extra speedy move of interest rates upward have put pressure on “Safe” assets, notably bonds or fixed income.

As reviewed here in great detail and with a special video on the subject, as rates rise, headwinds are created, BUT the opposite is true…. rates stabilize or even lower, big tailwinds…

Have Rates Peaked ?

Using the 10 year treasury as our marker for this review, after peaking 3.15% a few weeks ago, rates have come in and are now around 2.76% …. Progress and stability!

Here is a zoomed in chart….

Just like the change from Winter to Spring to Summer, it rarely occurs in a straight line…. remember also this longer term rate (10 years) is a measure of economic growth and will not be directly effected by the Federal Reserve overnight rate increases (thats our checking accounts)…

Have a Great “Interest Rate Watch” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

Capital Market thoughts, looking forward not back … FOMC chaired by Jerome Powell gave, now taking away, for the moment

We don’t want to get too heavy and pound you with market thoughts, we know you’re getting enough of that from the “Market in Turmoil” like headlines, but we did want to give some explanations and let you know we are watching carefully as we have been on notice since December for a possible slowdown.

Look forward, not back

Economic reports such as today’s CPI (consumer price index) report is very much rearview looking, as such it’s sometime easy to forget that what’s most important is looking forward to what is going to happen next rather than backwards to what has happened. Yes it is much harder, and you do not know exactly what is going to happen … but you sure do not drive a vehicle looking continually in the rear view mirror – some humor on a dry subject… stay with me!

This is even more evident at the recent quick rise in interest rates, creating the headwinds to bonds. As noted here and again here in our posts (the second with even a special video) it’s highly likely and the probability is most that the headwinds for our fixed income investments are behind us. Once again looking forward, a slow down usually garners lower interest rates, exactly opposite to our slightly current and mostly rearview looking higher rates.

FOMC chaired by Powell gave and now takes

Over the past 18 months to two years the FOMC (Federal Open Market Committee) headed by Jerome Powell have taken very aggressive measures to stimulate the economy. Much of a stimulation, once the book is written may have over stimulated not only the economy but various asset prices. Their goal at this time is to slow inflation thereby doing a complete turnaround from their prior stance and taking away stimulus. This most likely will continue until they see evidence of slower inflation or lower employment. 

Higher rates are their main instrument of choice:

The FOMC waits for the reports such as the CPI to confirm their decisions, making for a lag in decision making and possibly longer decision-making, but they will eventually get there….

Finally, capital markets are certainly looking forward hence the sluggishness as they begin to price in a slowdown in full force. Eventually it’s very likely the FOMC will begin to see these clues as well!

Have a Great “Forward Looking” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

Several Weeks of Consecutive Short Road Trips Finally … FOMC Raises Rates … Spring Friday Crazy Southern Weather

Happily, the schedule shows several road trips in the next few weeks making for a fast May …. Nothing air related, but a nice drive in all different directions in a return to normal…. as also mentioned in our Three Positives Happy Post here mid week….

FED Increases Rates – Jerome Powell

Mid Week, as expected the FOMC (Federal Open Market Committee) led by Jerome Powell increased the Fed Funds Rates (think our checking accounts) by 1/2 Percent or in Wall Street Speak, 50 basis points… We will talk more about this soon, but wanted to let the Capital Market Dust Settle before diving in….

Friday in the South – Heated Weekend

With near 1000 followers … many from all over the country of friends and clients we like to toss you the rollercoaster ride of deep South Texas weather every once in a while … a high 40 degree mid week start of the day to only top out at 60 this week, was a cool spell …. this weekend Donald the Brain hits 100 in his neck of the woods and we are expecting mid 90’s…

That is ok the cold, rain and ice are gone… Lot’s of water, sunscreen, shade and no extended time in the first round of heat….

Have a Great Friday and super Weekend- Talk next week!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

First Negative GDP Print, Half Way to the R Word … Happy Friday …

As mentioned here in our prior post, of the R Word…

A recession is defined by two consecutive negative quarter GDP prints…

This week we are half way there…

BEA Releases Negative Q 1 2022

In this BEA Release Here (Bureau of Economic Analysis) their ADVANCED estimate (it will be revised) came in at -1.4%

That gets us softly (thankfully) half way to the R Word! Hang tight, it likely will get rougher before calmer!

It’s a Friday and this is a bit heavy for the day, but wanted to get it out there for you to see….

Hey kept is short though…

Enjoy your Friday and your Weekend!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

An Original Epiphany thought on the Federal Reserve/FOMC and their Interest Rate talk from Weekend discussion and studies

Frequently Saturday morning is met with several long time acquaintances as our paths cross in timely fashion at the local Starbucks.

After a few pleasantries, the normal economic and market update question was presented. Maybe it was the extra restful sleep, maybe it was just starting the weekend out bright with a new thought, either way this possible Epiphany was worth sharing.

FOMC Talks Rates Up

What if the federal reserve, FOMC led by chair Jerome Powell were able to aggressively talk interest rates up, which they have done, but not actually have to raise rates near to the level of their chatter?

Currently using our Old Faithful CME Fed Watch interest rate tracker tool….8-10 Yes (8-10 WOW) normal rates priced into markets by July 2022…

95% Chance/Market Expecting/Pricing a 1.75% to 2.25% Rate by July – currently rates at .25%-.50%

So why would the federal reserve want extra room to not have to raise rates? If the economy naturally slows or goes into a recession and the Federal Reserve has raised rates very little it could be easily construed that they could say it wasn’t their fault!

Longshot, maybe, but if we were sitting in their perch that would be a nice safety net to have!

We listen and constantly research different thoughts by different folks and have not heard this in any venue!

So you heard it here first, thanks Starbuck buddies, for the new possibility!

Have a Great “Federal Reserve has an Out” day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

Interest Rates on the Rise, Bond Prices Versus Interest Rates, The Bigger Coupon, Possible Peak Rates … Special Video Analysis Refresher/Reminder …

With multiple comments over the last few weeks and a pick up in headlines concerning interest rates, we decided to do an analysis and review! We also have added a video to help explain some of the complexities associated with rates and bonds … as while at face value bonds are a simple animal, their movements can be puzzling.

The main reason for the increased headlines and comments are when rates go up, the value of bonds goes down initially, and rates have really jumped dramatically for various reasons.

YouTube

Briefly as a reminder, Bond aka Fixed Income aka corporates aka treasuries aka high yield aka Fixed Income instruments are nothing more than a note with an income stream to the purchaser of the bond! There is a saying the bond market is “Smart” because you only have to worry about the ability and willingness of the lender to pay… nothing else…

Rates and Bonds – I Go Up, You Go Down

The Green line is the yield on the 10 year treasury… The red is a huge bond fund from Vanguard called the BND….

No doubt that this is an almost perfect inverse relationship.

One detail worth mentioning, longer term bonds are more volatile, both up and down than shorter term i.e. A one year bond will not move near as much as a 30 year. This makes sense because the longer the term, the more payments that are owed and the more change in the prevailing rate effects the bond.

Fast Fast Fast Movement

In true, be careful what you ask for fashion, (we have long been positive towards higher interest rates) rates have moved incredibly fast, especially Mortgage Back Securities which are pools of mortgages used for determining current new rates…

This is the average 30 year fixed rate mortgage…. as of yesterday, this rate was well over 5%…this rate is almost double the rate just a few quarters ago…. With eventual supply, our home asset is facing some headwinds !

Much of this rate movement is coming from Federal Reserve Bank Presidents public comments…..

Why would they do this? To slow the economy… if they can get the market to move rates up, their job is easier ….heck if they can get market participants to do all the work, the Fed would hardly need to do anything… plus markets are much faster to react than the FOMC (Federal Open Market Committee)

Bigger Coupon

Once interest rates move, a new bigger income stream is the net effect… New purchases or re-investments are met with bigger income payments…

This continued higher income payment begins paying back the headwind of the drop in value as shown in the first chart…

Clipping that coupon will be nicer as rates increase!

How Far Can they Go? Rates and the FOMC?

Here comes is the sizzle…. be careful on extrapolating higher rates into the future… this extrapolation has garnered a lot of headlines as of late …. Whoaaaa

This is about a 35 year chart… go back farther, to a much younger demographic, there was a time when the FOMC raised interest rates to the roof… think 15-18% to tamp out inflation….

With an economy today of much more debt to service and older (more savers, less spender) demographics the last four decades have been a slow but continued lower longer term rate….

Note the top of the prior interest rate cycle looks like the top of the FOMC rate hike…again the last four decades….

Stall Speed

With the afore mentioned cycle high repeating as the following cap on rates, looks like, although very fast rate movement recently, the majority of the move is likely over….and therefore less headwind for the value of bonds and bigger coupons….

Lastly… a slowdown in economic times or a rush for the safety of our simple friends usually leads to a reversal in rates and a repeat of the afore mentioned process…but in reverse… lower rates, higher prices!

Have a Great “Bonds and Interest Rate Analysis” Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents

First Quarter 2022 Review, Fast Quarter

Remember when we were kids and it seem like the birthday would never come? Now they seem to come on almost a quarterly basis!

Speaking of a quarter, as we look back over the first quarter of this year, 2022, Wow, we had a lot of things occur.

Interest Rates

As the calendar turned, the FOMC, led by chair Jerome Powell, reading very rearview mirror inflation data points, began verbally discussing aggressive rate hikes.  Right on cue fixed income participants front ran the Fed and raised interest rate across the board.

Mortgage rates, specifically 30 year fixed mortgage rates have risen in percentage terms faster than any time in history.  This is likely a product of the stopping of monthly FOMC purchases of mortgage back securities. It would not be unreasonable to think that current levels could be an overshoot from the artificial downward pressure the federal reserve had been creating.

As of late, several Federal Reserve Presidents have publicly doubled down on even more aggressive rate increases, pushing rates even higher.

Longer-term, recall increasing interest rates are headwinds to fixed income instruments initially, but higher interest rates mean greater income longer term.

Fiscal Stimulus Comparables

As we exit this quarter, and enter the next, we begin a journey over one of the most interesting comparable times in history. As noted in our Q1 and Q2 newsletter, tough comparables will likely make for a natural slowing of the economy. Recall last year at this time over $1 trillion of stimulus was pushed into the economy. As mentioned once again in our newsletter, this is a natural slowing and will be a tail wind to the federal reserve as they raise short term interest rates in an attempt to slow the economy.

And did we mention there was major Geopolitical conflict?

There is a saying that conflict is the great geography educator. Certainly it was a surprise to see the amount of resources that come from the two countries in conflict. The lack of resources on the natural market may be a headwind to lower prices of certain commodities..

In closing, the really good news is that much of what we have experienced in this past quarter, and the coming next quarter, in birthday like format may likely come and pass much faster than previously experienced.

Sincerely,

John A. Kvale CFA, CFP

Enclosure (2022 Report)

Get Ready for the R-Word Headlines … The What Word?

Inverted Yield curves have an odd and accurate way of predicting the R Word (What’s that, we rarely say this word out of optimism…… RECESSION!)

This post was actually started early last week, BEFORE a ton of headlines…. a quick google search of “Inverted Yield Curve” yielded the following….

Ok, so the word it out… but let’s go ahead and discuss….

Yields are a reflection of risk, so the longer the time, the greater the risk, the higher the yield “Should” be…

The Yield Curve is most notably the curve from normal times, lower left to upper right and is basically the yields (% interest rate) of the different time terms, such as 1,2,3,4 …10 year treasury…

Hand Drawn from Prior Inversion Period and Analysis

There are all types of ways to measure, but one of the most accurate is the 2 years treasury against the 10 year treasury yield…

So by taking the 10 year yield and subtracting the 2 year yield, under normal times there will be a positive difference…. When the difference is negative, there is a problem as longer term risk/interest rates are lower than shorter, creating the inverted yield curve…..

2 year and 10 year Current Spread Update

1976 to present, grayed areas are R- Words

And a more blown up last year to date (had to update this chart too, as last week it had NOT inverted)

Not a deep inversion, but it has inverted…

Couple of important thoughts:

The R word is defined by two negative GDP prints in a row (no matter the depth i.e. could be -.01 and -.01)

While accurate in predicting (2-10 spread) timing is not, times vary from inversion after the R-Word has already started to multiple years…

Just as timing is a mystery, as mentioned above, depth of the R-Word from this mighty predictor is also variable…

We are watching, and you will certainly be seeing headlines!

Now you know!

Have a Great “R-Word Heads Up’ Day!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.

A Dallas Texas based fee only

Financial Planning Total Wealth

Management firm.

jkfinancialinc

street-cents