This Week’s Economic Update, November 13, 2023

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I want to wish a belated Thank You for your service to all our veterans.  Your sacrifice has allowed us to maintain our freedom.  We should all recognize that putting your life on hold to serve our country is the ultimate in unselfish service.  My Uncle Bob left my grandparents farm and enlisted knowing he would be sent to Korea to fight.  I remember as a young boy, letters and audio tape from Uncle Bob as he served at Bien Hoa Air Base in Vietnam during the Tet Offensive.  My hero passed away five years ago from the effects of Agent Orange.  That did not diminish his service nor his love for our great country.  Thank you to all the veterans, whatever your sacrifice was, it is truly appreciated.

In August of this year the 10-year Treasury Note rate started to rise.  It moved from about 4% to a peak in mid-October at about 5%.  The long-term rates are moved by the market place, based on demand for the debt of the United States.  Until early 2022 the Federal Reserve had been purchasing the government bonds to keep interest rates low in part to assist the housing industry.  Over the past 18 months the Federal Reserve has curtailed purchases and allowed the market to set the rates.  This led to the rise in long term rates. 

The interest rates will rise if there is an increase in debt being offered by the Treasury to cover our government spending.  It would also rise if there was a limit to the number of buyers of our debt.  The Federal Reserve now holds one Billion Dollars less in Treasury notes than they did in 2022.  Therefore, we are now seeing a pure sense of what the world thinks of purchasing our debt.  Particularly, since we are financing an ever-larger debt due to record spending.

As of Friday, last week, 1- year rates fell to 4.6%.  Since the middle of October, the world seems to be drawn to the US debt.  This is likely due to the instability that is occurring in the Middle East as well as in other parts of the world.  This will provide a relief for the mortgage market as financing rates are related to the Treasury rates.  How long this reprieve will last is unknown.  At least for now the US seems to be a safe haven.

Our oil exports continue to expand.  As demand for fossil fuel supplies softens and our production continues at historic highs, we are not one of the largest exporters of oil to the world.  The supplies world wide are expanding and storage is again being filled up.  Unless there is a major disruption in the middle east, we can expect a continued softening of prices.

While the consumer has been on a tear, continuing to spend, it could be the party is ending.  The level of consumer debt is hitting another peak.  Some of this relates to the high mortgage levels.  The amount of revolving credit has essentially been flat in the last year.  Consumer confidence is souring based on the latest reports.  The savings percentage is back to pre-pandemic levels as the stimulus funds are all used up.  Inventories are plentiful with retailers hoping for a big Christmas season.  Right now retail sales are sliding in spite of many early sales.  This is something to keep an eye on.  With ample inventories and a slowing in spending, we will have to keep an eye on the core inflation number.  We might see a level of deflation spreading across the economy.

Have a great week.



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