The Dow and S&P 500 both hit new all-time highs on Thursday to potentially round out another month of equity gains. At the same time, the yield curve seems less optimistic about future prospects for the economy, widening to 63 basis points; creating the steepest curve since April. Yields on the short-end are falling on bets for FOMC rate cuts while yields on the long-end rose in sync with concerns about inflation expectations. Tom Essaye of the Sevens Report noted, “If the Fed is perceived as caving to pressure from the administration and lower rates prematurely to placate the White House, it risks inflation becoming more entrenched. Since longer-dated yields trade primarily off inflation expectations, this pressure is boosting the 30-year Treasury yield.” 

The last PCE report before the September FOMC meeting came in line with market expectations, reporting a 0.3% MoM increase and a 2.9% YoY increase. That’s 0.1% higher than June and the highest level reported since February. Markets remain unperturbed so it looks like it will come down to next week’s government jobs report to possibly put the final market stamp on a rate cut for September. Interest rate futures have moved off the certainty of a full 25 bp cut next month but still show an 83% chance for 50 bps in cuts before year-end. 

Bloomberg reported an increased prevalence in the 7-year auto loan, comprising 21.6% of all new-vehicle loans in the second quarter, with 6-year terms comprising 36.1% and 8-year loans about 1% of new originations. We all know the longer terms create a higher probability for negative equity on trade-ins due to increased interest expense and slow buildup of equity. 

In another sign of credit deterioration, VantageScore reports prime credit borrowers are beginning to fall behind on debt payments. Repayments over 90 days were up 109% YoY in the super prime segment, while the prime segment posted a 47% increase over the same span. The absolute terms of the increase remain modest but show even the most credit-healthy consumers are starting to feel the crunch.

The Case-Shiller report showed the price of a new home decreased 6% YoY to $403,800, the lowest level since July 2021. There are also significant regional divergences in home price changes with New York and Chicago increasing 7% and 6.1%, respectively, while Dallas and San Francisco fell 1% and 2%.

KEY INDICATORS THIS WEEK

GDP - Upwardly revised to 3.3% from 3.1% due to an increased assessment of business investment.

Next week - Jobs Week!!!