🧭 The Weekly Scoop

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Here’s what you need to know this week.…

This week, things went a little haywire. Investors are struggling to determine where the economy is headed next, and interest rates are spiking. Yields on US treasury bonds, the bellwether for most other bonds and debt, rose to the highest level in 15+ years. Mortgage rates have risen to 20+ year highs because of it. [🤓]

So, who’s making mortgages so expensive? That’s the question no one has a perfect answer to, but let’s dig in.

What are people talking about? It's mostly the interest rate on the 10-year US Treasury bond. The government borrows money from investors using bonds - basically small loans chopped up and sold on the market like stocks. So, the rate is roughly what the government has to pay in interest to borrow money.

The most important thing to know is that interest rates are driven by the market. That means the movements can be emotional, volatile, and complex. So, interest rates can’t always be rationalized - just like the stock market has its emotional swings that don’t necessarily match the reality of the economy. The recent moves in interest rates look much more like those market-driven drama moments than a rational demonstration of the state of the economy. It gets more confusing if you dissect the main fundamental drivers of interest rates.

It’s a little late for economic optimism. US Treasuries are seen as the safest investments in the world. So investors buy treasuries when fearful and sell them when optimistic about the US economy. It’s hard to point to a massive surge of positivity anywhere. While the economy has held on much longer than anyone anticipated, it’s clearly the weakest it’s been all year.

It’s hard to blame it entirely on the Federal Reserve. While the Fed has raised short-term interest rates more quickly than any time in the past several decades, that’s not a new update. Policymakers in recent weeks have also been signaling an end to interest rate hikes. The less visible factor is the decrease in the Fed’s bond purchases. The Fed had been one of the biggest buyers of US Treasuries as a way of pumping more money into the system to stimulate the economy. It has walked back those policies since last year. The decreased demand could take some of the blame, but again, not a recent shift.

The government likely deserves some blame. The inability to properly balance the federal budget has led to massive debt accumulation. The government almost shut down a few weeks ago, and may again next month, because Congress can’t agree on a spending plan. The government used to be able to overspend and borrow at interest rates so low that it was practically free. That’s not the case anymore; investors worry about the prudence of more debt. Lenders make riskier borrowers pay higher interest rates, and the US isn’t looking too financially responsible.

The list of culprits could continue, but the critical thing to remember is that this is similar to a stock market selloff. There are usually good reasons multiplied by fear and uncertainty. Uncertainty is in abundance right now. Keep track of interest rates to determine how they affect your loans, mortgage, and savings.

🐂 Reasons to be optimistic:

• Most economists think we'll be able to avoid a recession. In a recent quarterly survey of economists by The Wall Street Journal, the average probability of recession dropped below 50% for the first time in over a year. Most economists expect strong economic growth through the end of the year and believe that policymakers have finished raising interest rates to make borrowing more expensive.

• Fewer Americans got laid off last week. The Labor Department reported that initial jobless claims fell to 198,000, the lowest level in nine months. Unemployment is historically low, and there are still more than 1.5 available jobs for every unemployed person. Policymakers have been restricting the economy to get the supply and demand of workers closer to balance.

• Policymakers think the economy is doing fine but not great. The Federal Reserve's bi-quarterly Beige Book report indicated that living costs aren’t rising as quickly anymore, consumer spending is losing some willpower, and hiring has slowed. Policymakers predict stable to slightly weaker growth of the overall economy for the next few months.

• Americans kept spending in September despite rising costs. The Commerce Department reported retail sales rose by 0.7%, more than double what economists expected, and outpacing inflation in price tags. Higher gas prices and spending at the pump raised the overall spending figure. Consumers spent less on things like electronics, appliances, and retail clothing.

• Rents have finally started to drop in some of America's priciest cities, including New York and Miami. After months of steadily climbing prices, New York's median new lease rent dropped to $4,350 last month, down 1.1% from the record high in July. In Miami, there has been a significant dip in the median rents for luxury apartments and homes, falling far below the recent record highs from pandemic relocations. Vacancies in both cities are also up, suggesting that renter demand is starting to wane.

• US factories are coming back to life. The Federal Reserve said industrial production rose to its highest level in nearly five years in September. This is mainly due to significant contributions from the mining and manufacturing sectors despite the autoworker strikes at the end of the month. American spending has been resilient, keeping factories busy. Policymakers have been trying to slow business activity to reduce inflation, so strong spending and production figures spark concern for more restrictive policies.

🐻 Reasons to be pessimistic:

• High home prices and expensive mortgage rates have stalled the housing market. According to the National Association of Realtors, existing home sales declined 2% last month, reaching their lowest level in thirteen years. Mortgage rates are higher than they’ve been in +20 years, and a housing shortage has kept prices from falling much from record highs. First-time homebuyers have stepped back, making up a much smaller portion of the buyer pool than usual.

• Home affordability keeps sinking, deterring buyers. The average 30-year fixed-rate mortgage rate rose to 20+ year highs for the sixth consecutive week, inching closer to 8%. The Mortgage Bankers Association said 6% fewer people applied for a mortgage last week, down 21% from last year. This is the lowest demand for home loans in nearly 30 years, with many prospective borrowers unable to afford the current rates and high home prices. [🤓]

• There’s no end in sight for the housing shortage. The National Association of Home Builders reported home builder confidence sank for the third month to the lowest level since January. Home affordability has fallen near record lows, sidelining both buyers and sellers and stalling the market. Available homes on the market have reached multi-year lows, and the low supply has kept home prices high. Pessimistic builders lead to less construction and more insufficient supply.

• New home construction picked up last month, but it’s far from solving the housing shortage. The Commerce Department reported a 7% jump in new home construction for September after a significant drop in August. Both single-family and multi-family housing starts rose. Permits to build homes, however, dropped, in line with waning homebuilder confidence. Low affordability has stalled the market, and available home supply is way lower than usual. New homes are a fraction of the market, though, so the real supply issue is current owners wanting to hang on to their cheaper mortgage rates.

• Worker strikes keep escalating. Negotiations have broken down between Hollywood studios and the 150,000 actors’ union, casting doubt on the industry’s ability to salvage the 2023 television and film release schedules. The Hollywood strikes started in May, with film and television workers seeking not only wage increases but also protections against Artificial Intelligence. In positive news, 75,000 healthcare employees of Kaiser Permanente have reached a tentative deal with the company for better pay and solutions for staffing shortages. It’s been a crucial year for the labor movement.

Big banks kicked off earnings season this past week, and America’s biggest companies are doing better than expected. More than 75% of companies have reported higher profits than investors expected, according to Factset.

Public companies are required to report on their financial health every quarter. We get a look at their sales, expenses, and profits (aka earnings). The end of the quarter, when most companies give their reports, is called earnings season. It doesn’t outshine pumpkin spice latte season, but it’s a big deal on CNBC.

Big banks have proven their pricing power, reaping huge profits by raising borrowing costs without increasing their savings and deposit account payouts by nearly as much. The banks don’t have to compete for deposits with high-yielding savings accounts like smaller banks do.

This week, Netflix also flexed its market power, demonstrating the benefit of being an early adopter in streaming and reaching profitability. Other media giants like Disney have made big bets to shift into streaming but are far from profitable. The Hollywood strike production delays will hurt them much more than Netflix.

Procter & Gamble proved if you own enough consumer brands, you can keep raising prices despite six straight quarters of declining sales volumes. They just keep selling less stuff at higher prices and growing revenue.

Click to dig in & vote your reaction, see how others feel

• JPMorgan Chase benefits big from higher interest rates [🤓]

• Citigroup shakes up its business model and boosts profit 

• Bank of America earns more in interest

• Procter & Gamble flexes its pricing power

• Netflix subscribers surge after password sharing crackdown

(These links only work for 24 hours while the story is live)

🏡 For your home

7.7% = Average 30-year mortgage rate

That’s up from 7.3% a month ago and up from 6.9% a year ago. _{Mortgage Bankers Association, 10/13/23}

$394,300 = Median existing home sales price

That’s down from $404K the month before and up from $384K a year ago. _{National Association of Realtors, 9/30/23}

💼 For your work

198,000 = Layoffs Last Week (Initial jobless claims)

That’s down from 211,000 the week before and in line with pre-covid averages. _{Labor Dept., 10/13/23}

336,000 = New jobs added in September

That’s up from 227,000 in August and above pre-covid averages. _{Labor Dept., 9/30/23}

3.8% = Unemployment rate in September

That’s the same as August and still near the lowest rate in 50+ years. _{Labor Dept., 9/30/23}

9.6M = Available jobs in August

That’s up from 8.9M in July and well above pre-covid averages of ~7M. _{Labor Dept., 8/31/23}

Who’s hiring: Professional and Business Services, Leisure and Hospitality

Who’s firing: Arts, Entertainment, and Recreation

👜 For your wallet

3.7% = Cost of living increase (1-Year Inflation)

Living costs are 0.4% higher than the month before. Normal inflation sees prices rise by 0% to 0.2% per month, 1-2% per year. _{Bureau of Labor Statistics, 9/30/23}

2.4% = Groceries cost increase (1-Year inflation)

Groceries are 0.1% more expensive than they were a month ago. _{Bureau of Labor Statistics, 9/30/23}

$3.57 = National Average Gas Price/Gallon

That’s down from $3.88 a month ago and down from $3.85 a year ago. _{AAA., 10/19/23}

💰For your savings

0.46% = Average interest banks pay on a savings account_{, FDIC, 10/16/23}

5.50% = Interest rate banks earn on their savings accounts_{, Federal Reserve, 7/26/23}

The Federal Reserve has raised baseline interest rates from 0% to 5.50% in the past year. Make sure your bank is paying you higher interest on your savings.

💸For your investments

-2% = This past week’s change in the US Stock Market

-4% past month, +16% past year, and +53% over 5 years. _{S&P 500 Index, 10/19/23}

4.99% = The yield on the 10-Year US Treasury Bond

Yields are +7% this past week, +15% this past month, and +21% over the past year. _{US Government Bonds, 10/19/23}

+7% = This past week’s price change for Bitcoin

+5% in the past month and +50% in the past year. _{Coinbase, 10/19/23}

+2% = This past week’s price change for Ethereum

-5% in the past month and +22% in the past year. _{Coinbase, 10/19/23}

A mortgage is a loan you take out to buy a home. The collateral, the thing you lose if you don’t pay back the money, is the home itself. The collateral reduces the risk for the lender. Credit cards have much higher rates because there’s no collateral.

Mortgage rates can be fixed or floating. A fixed rate means you've locked in that percentage of the loan you need to pay back in interest each month, and it won't increase. A floating rate is usually tied to the movement of a benchmark interest rate. So, as broader interest rates rise, your rate increases, and you pay more each month.

Whether fixed or floating, banks determine their mortgage rates by taking a baseline low-risk lending rate like US Treasury bonds, then marking it up based on how risky you are as a borrower. So banks say, OK, we can lend to the US Government (considered no default risk) for ten years at 4% interest. You're more likely to default than the US Government, so you must pay us higher interest to make it worth the risk, maybe 7%. As baseline rates rise, your rates will rise.

Wall Street bank business models can be opaque and confusing. They mainly earn revenue from lending, managing investments, executing trades, and brokering corporate deals.

The traditional banking business model entails taking deposits, paying some interest to the depositor, and lending that money to someone else at some higher interest rate. Banks profit from the spread between the rate they pay the depositor and what they earn from their loans.

Investment banking isn't actually the investing arm of the bank. Investment banks assist companies with large transactions, earning fees for their advice. In the same way that a real estate broker earns a commission for helping sell your house. Investment banks earn a hefty commission for helping you value and sell your company to other companies or the public (IPO).

The investing arm of the bank is called asset or wealth management. These divisions earn fees to oversee clients’ money, provide advice, and invest on their behalf.