Winners After Fed's Latest Interest Hike. Possible?
As anticipated, everyone was waiting for the 2:30pm press conference on Wed, 26 Jul.
US market was trading sideways in the morning; spiking at 2:30pm when the FOMC press conference started.
As the press conference progresses, market began to dip when there was no clear signal that the Fed will halt further interest hike.
By the time market closed for the day.
DJIA: +0.23% (+82.05 to 35,520.12).
S&P 500: -0.02% (-0.71 to 4,566.75).
Nasdaq: -0.12% (-17.27 to 14,127.28).
Gist of Mr Powell’s Press Conference
"The process of getting inflation back down to 2% has a long way to go," said Mr Powell.
“Bringing down inflation is likely to require a period of below-trend growth and some softening of labor market conditions", he further added.
Lastly, Mr Powell added “The central bank had not made a decision on whether to hike rates at its next meeting in September.
Between July & September, the Fed would consider a slew of economic data including (a) two monthly jobs reports, (b) inflation reports, and (c) data on economic activity.
Why did market conjure the belief that the Fed will halt further interest hike is beyond me? There was never any explicit indication/s.
Of the “Tri-factors” mentioned in my post Q2 Earnings, Data, Interest Controls US Market This Week.; below is an update on item #3 - Official data; now that item #2 - FOMC meeting “& conference is completed.
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Official Data Released So Far.
(1) Conference Board (CB) Consumer Confidence - June 2023.
US consumer confidence for June 2023
Conference Board (CB) Consumer Confidence measures the level of consumer confidence in economic activity.
It is a leading indicator as it can predict consumer spending, which plays a major role in overall economic activity.
Higher readings point to higher consumer optimism.
June 2023 data came in “stronger” at “117” vs forecast of “111.8”; indicating US consumers are confident about the economy.
June 2023 data is also stronger than May 2023’s 110.1.
(2) US Home Sales - June 2023.
New Home Sales measures the annualized number of new single-family homes that were sold during the previous month.
This report tends to have more impact when it's released ahead of Existing Home Sales because the reports are tightly correlated.
For June 2023, new Home Sales was “697,000” units (sold) vs forecast of “725,000” units. This is -3.86% short of forecast.
Compared against May 2023 data (715,000 units); June is also weaker by -2.52%.
As a rationale consumer, it is not difficult to see why & how one could be confident about US economy continuing to improve overtime and yet not comfortable about getting a property.
This is because a property is a big ticket item. With an ever-rising interest, it is not a joke when costs of borrowing grow by leaps and bounds.
“Winners” After Latest Interest Hike.
Strange as it maybe, there are actually “winners” despite the Fed’s 11th interest hike to an unprecedented high since March, 2001.
So, who are the winners in the land of rising interest rates?
(1) Savings accounts & Fixed deposit accounts.
With the latest revision, savers will stand to benefit from the “high” interest rates.
With US market rallying to an all-time high current, keeping one’s stash earning interest with an easily 5% “guaranteed” returns is a strategy in its own rights!
Even Singapore investors with “idle” US dollars could do it too (see below).
As of June 2023
(2) Bond Investors.
Bond investors can benefit from the Fed raising interest rates in some ways.
For instance:
Higher yields: When interest rates rise, new bonds are issued with higher coupon rates. This means that investors can earn higher yields on new bonds than they could before.
Reinvestment: When existing bonds mature, investors can reinvest the proceeds in new bonds with higher coupon rates. This can help increase their overall yield.
Media is already "advertising" for Bond as investment
(3) The US Federal Government.
The US government benefits from the Fed raising interest rates in its “quirky” ways too:
Reduced inflation: When the Fed raises interest rates, it can help reduce inflation by making borrowing more expensive. This can help prevent prices from rising too quickly.
Strengthened dollar: When interest rates rise, foreign investors may be more likely to invest in US assets. This can help strengthen the US dollar.
How I See US Market Will Behave?
I do not think US market will “celebrate” because of US consumers’ confidence is gaining grounds month on month.
Similarly, home sales data is a reflection of consumer’s economic situation. Buying of new homes is unlikely to trend upwards due to a newly “revised” higher interest rate.
With the initial euphoria over all things “Artificial Intelligence” slowly tapering, this item should regain traction when a company is able to monetize it.
I think it is possible that some Mega cap companies that had experience recent “AI runaway success”, will experience corrections, if it cannot “show market the money”.
Do you think US market will continue to rally or pull back today?
Do you think you will take advantage of the revised US interest rate and open a 3 months USD fixed deposit? The returns are “guaranteed” if FD is hold till mature.
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The current interest rate on a 3-month USD fixed deposit is relatively high. This means that I could earn a decent return on my investment.
I am a risk-averse investor, so I would prefer to invest in a safe investment like a fixed deposit.
Great ariticle, would you like to share it?
My investment goals are to preserve my capital and earn a modest return. A 3-month USD fixed deposit would be a good fit for my investment goals.
1
Nice