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Is The FED Splitting Into Two Camps?  90-Day Treasury Yields At 5.25%

The Fed appears to be splitting into two camps; one to pause and the other not to pause.  St. Louis Fed President James Bullard is backing two more interest rate hikes in 2023.  His Minneapolis colleague Neel Kashkari says next month is a “close call.”

Their remarks yesterday follow a clear signal from FRB Chair Powell last week that they should pause at the June 13-14 meeting to assess the impact of past increases on price pressures amid strains in the banking system.

Currently swaps are suggesting about a 22% chance of increasing rates next month, essentially unchanged from late last week.  As discussed many times, swaps are market sentiment indicators that are now extremely volatile and are perhaps no longer an accurate gauge of policy and market direction.

A topic that is now perhaps gaining greater attention is whether the data itself has become corrupted or is no longer accurate.  The fraud in weekly jobless claims has been highlighted several times.   The moving of the goal post of various benchmarks has also been discussed.

Several news organizations are now openly discussing the possibility the data collection and the interpretation of the data is now politicized by an extremely powerful and unaccountable bureaucracy.  How or will this narrative continue to unfold?

Changing topics, Bloomberg writes the NASDAQ 100 is off to its best start of the year since 1998.  Some of the top names have posted rallies that have been nothing less than impressive. AAPL which makes up more than 10% of the index has jumped 35% this year, obscuring the damage that is occurring beneath the surface as almost half of its names are down year to date.

The NASDAQ 100 is trading at 25 times forward earnings, a PE ratio that is starting to look really expensive especially if profits disappoint.  AAPL is trading about 28 projected earnings, the stock is in rarefied air for a technology firm whose revenue is expected shrink this year and is trading at a premium to its own history as well as the market according to Bloomberg.

Commenting about the Treasury market, the government sold $57 billion of three-month securities at 5.25%, the highest rate for this benchmark since 2001.  The yield is a direct result of the fears surrounding a possible default.

As noted many times, the Treasury has prioritized payments if the debt ceiling is not raised.  Principal and interest will be paid on the national debt. It is also widely accepted that social security and Medicare payments will also not be interrupted. 

It is largely agreed Washington is acting recklessly, perhaps in its attempt to appeal to or placate the party’s idealogues.  Today will also pass but the question at hand is the damage it might do to our elected class and to our national prestige.

Last night the President and Speaker met, a meeting called as productive and professional but no deal yet.

Last night the foreign markets were down.   London was up 0.32%, Paris down 071% and Frankfurt down 0.11%.  China was down 1.52%, Japan down 0.42% and Hang Seng down 1.25%.

Markets should open nervously flat.  The 10-year is off 8/32 to yield 3.78%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.