TL;DR
- The latest CPI data is in, and inflation is back in it’s target range at 3% annualized
- It’s likely not going to chance the Fed’s decision at the next FOMC meeting in a couple of weeks, but they’ll be thinking seriously about their plan for the coming months
- The real estate sector, in particular. will be happy with the news as high rates stifle home sales
- Top weekly and monthly trades
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Major events that could affect your portfolio
Well, that happened quickly. Just like that, CPI inflation is back within the Feds target range of 2 to 3%. Only just, mind you, as the annualized figure came in at 3.0% on the dot. But still. That’s less than half of what it was at the beginning of this year and a huge swing from the 8.5% from a year ago.
Inflation has obviously been a hot topic for a while now and it, coupled with the Fed’s interest rate response, has been having a major impact on markets. Despite the constant questions around what’s going to happen at the next FOMC meeting and whether or not rates will be hiked again, up until this point, the Fed has been very consistent in their messaging.
Fed chairman Jerome Powell has stated over and over that they’re sole objective is to bring inflation back down into their target range, and they’ll use every tool at their disposal in order to get it there. And now it’s happened.
So what does that mean for interest rates? Well just a few short days ago, the Chicago Mercantile Exchange (the largest options and futures exchange in the world) put the probability of a rate hike in July at 92%. While that’s probably still the most likely outcome, it’s fair to say that all bets are off at future meetings.
Regardless of the exact timing, it’s clear that the Fed’s rate hike cycle is almost surely coming to an end.
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That’s a change that would be welcomed in the real estate sector. With the fastest rate hikes since the 1980’s the property market has ground to a halt. Potential first home buyers have been facing monthly payments hundreds, or even thousands, of dollars higher than they were a year or two ago, making it increasingly unaffordable to get on the housing ladder.
But the big differential between rates now and over the past couple of years means existing home owners are practically trapped as well. The need to move and refinance would mean a reset to a mortgage that is likely to be more expensive, putting it out of reach for many.
But the lack of sales means inventory is incredibly low, which has allowed prices to remain fairly stable.
That’s not to say prices haven’t come down at al. National housing prices dropped by 1% in Q1 2023 from the end of last year, with San Francisco the hardest hit seeing prices fall by 6.7%.
Until rates start to come back down, this situation isn’t likely to improve.
This is important not just for real estate as an asset class but stock markets as well. Mortgages and other loans provide massive amounts of revenue for the financial sector, which has a flow on impact to practically every business out there.
Many executives will be hoping the Fed starts to reverse rates sooner rather than later, though it could still be a long while before we see them as low as they were in 2021.
This week’s top theme from Q.ai
We could be heading into uncharted territory. Well, uncharted in the context of the past few years anyway. The global trend over the past year or two has been one of high inflation and in turn, rising interest rates. This hasn’t been comfortable, but we’ve become accustomed to it.
And for markets, that’s not really a bad thing, because instability is the main driver of fear and volatility. We’ve seen that play out in the stock market. 2022 was a horrible year as markets panicked about the impact of rapidly rising rates. By 2023 high inflation and high rates had become a bit old hat, and it was clear that the economy wasn’t going to implode overnight.
But now we could be about to enter another era of uncertainty. It’s likely going to be a little while yet until we see rates on their way back down, but when that happens there will almost surely be concerns about whether inflation will spike. That could make markets very nervous.
And so with some gains in the bank so far this year, for investors it can be worth looking at what type of insurance policy they have in place.
Our version of this is Portfolio Protection, which uses AI to assess your portfolio’s sensitivity to a range of different types of risk, then automatically implementing sophisticated hedging strategies to protect against them.
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Top trade ideas
Here are some of the best ideas our AI systems are recommending for the next week and month.
Autozone (AZO) – The aftermarket auto retailer is our Top Buy for next week with our AI giving them an A rating in our Low Momentum Volatility factor. Earnings per share is up 12.4% over the last 12 months.
Light & Wonder (LNW) – The adult gaming company is our Top Short for next week with our AI giving it an D rating in Quality Value and Low Momentum Volatility. Earnings per share was up -$1.14 over the last 12 months.
E2open (ETWO) – The supply chain software company is a Top Buy for next month with an A rating in our AI’s Growth factor and a B in Quality Value and Low Momentum Volatility. Revenue is up 25.5% over the last 12 months.
Upstart Holdings (UPST) – The AI lending platform is a Top Short for next month with our AI giving them an F rating in Quality Value. Revenue is down 37.3% over the last 12 months.
Our AI’s Top ETF trades for the next month are to invest in Brazilian small caps, Brent crude oil and European stocks and to short small-cap momentum stocks and Taiwanese stocks. Top Buys are the iShares MSCI Brazil Small-Cap ETF, the United States Brent Oil Fund and the Vanguard European Stock Index Fund. Top Shorts are the Invesco
IVZ
DWA Smallcap Momentum ETF and the iShares MSCI Taiwan ETF.
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