Tag Archives: FOMC

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

New Lease Signed at 8222 Douglas … Preview- Interest Rate Deep Dive … The Masters Weekend … Friday

It’s finally done!  We are happy to announce we have signed a new lease extending our stay here for about another six years from today! yay

The lengthy signing was certainly not due to knuckles and a negative experience, but more from a conflict of schedules on all parties. After just a few renditions we settled on a happy extension, more costly, but very happy to be in our same location for the next greater than a half a decade.

8222 Douglas Ave # 590 – Home of J.K. Financial, Inc.

Preview of Interest Rate Deep Dive

With some terrific dialogue both here and in the headlines concerning interest rates, we are happy to preview a deep dive on rates next week and a reminder on the ultimate affects interest rates have on asset prices and the economy.

Masters Weekend – Return to Normal?

This weekend, in a more back to the normal Masters Golf Tournament …. we can see one of its all star students who 25 years ago this year made his amazing splash onto the venue. Will be watching, hope you will as well for some wonderful scenic views and back to normal spring sports!

Ahhhhh …. today is a Friday, heading into what looks to be a beautiful weekend here locally, hopefully it’s nice where you are, enjoy your 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

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

CPI – Consumer Price Index Further Analysis … Why it has likely peaked, Tough Comparable

The lead Article in our Q 2 2022 Newsletter, reviewed here along with a Video review as well, spoke to a possible tough comparable slowdown from the over $1 Trillion of stimulus pushed directly into the economy almost exactly one year ago …. and was all about the hurdle coming up from the calendar cross over of that stimulus…

Consumer Price Index (CPI) Not Immune to Comparable

In a very similar vein as the above mentioned hurdle, the inflation index gauge/CPI that many follow (Especially the FOMC) closely has a very similar hurdle event occurring…..

Notice the very large annual increases in January and February of 2022? (Orange Bar) But look close at the relatively benign reading from the prior year (tiny blue bars) … That benign reading is the base comparison at which the index comped…

Pretty easy to see as we go further into the year, the base comparisons are much harder (blue bars rising fast)….

As detailed here on our “Make UP of the CPI’ there are components that have risen a lot … think oil and rent (here is a great discussion we had on rent increases directly), which has a lag effect of coming into the system

These increases are not likely to be enough to cover the tough comps…..

Bottom Line: Likely to see peak CPI numbers within the next few readings….

Lastly, while the CPI may normalize, many if not most inflated items (wages, food, consumer services) will likely stay at the current level…. but not continue upward…

As the FOMC led by Jerome Powell attempt to lower this number, a natural slowing may already be a tailwind.

Have a Great “CPI Likely Peaking” 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

CPI – Consumer Price Index Survey Weights – C/O Another New Fantastic Research Service … Pew Research Organization

With a tremendous amount of attention being paid to the Bureau of Labor Statistics CPI Report (Consumer Price Index), we set off as part of our research to find an easy explanation of the breakdown of the index.

As a reminder the CPI index is a measure of inflation, hence the increase rhetoric not only in the public domain, but here as well, as we have spoken about it multiple times via analysis.

Back to the analysis, we found tons of information about the make up of the aforementioned CPI index, and a 100 plus items that make it up, but oddly it took us some time to find the true easy breakdown in larger macro elements of the CPI index.

Great news, a new approved non-copyright use from a fantastic new research service called Pew Research has been discovered. With approval from their public relations folks, we are happy to finally show you this wonderful graph that breaks the CPI index down into very easy and visually friendly context.

We will be referring back to this graph frequently, as some of our future commentary will be about this CPI index, and what it may look like in the future and what it means from a Federal Reserve/FOMC standpoint.

Have a Great “CPI Index Simplified” 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