Bob’s Journal for 4/21/22

Interest Rates on Safe Investments Soar

Market interest rates are rising.

That’s bad for bonds but good for safety-first investments. While the headlines focus on big losses in bonds, they rarely point out that the yields available to conservative investors are higher than they’ve been in years.

Stan the Annuity Man Haithcock points out that now you can earn safe, tax-deferred yields that could be only dreamed of a few months ago. I visited the calculators on Stan’s website and checked out the rates for Multi-Year Guaranteed Annuities (MYGAs). These are the insurance industry’s alternative to CDs.

Recently, three-year MYGAs available from insurers with top safety ratings had yields of 3% and higher. Five-year yields were 3.35% and higher. Even one-year yields now are at 1.00%.

One advantage of MYGAs over CDs is that interest on the MYGAs compounds tax-deferred until distributed to you.

You can set up a MYGA ladder, dividing your cash between one-year, two-year, three-year, four-year and five-year annuities. If interest rates continue to rise, next year when the one-year annuity matures, you invest the money in a new five-year MYGA at a yield above 3%.

You can do the same thing with CDs, but you won’t get the tax deferral, and the yields are likely to be much lower than for today’s MYGAs.

Take a Close Look at Recent Inflation Trends

A detailed look at the recent Consumer Price Index (CPI) report indicates inflation probably will fall from the extremely high rates of the last few months, but it will be a while before the CPI is back near 2%.

The rapid increases in energy and food prices the last couple of months aren’t likely to continue, and prices for those items could decline from their recent highs. That would help reduce the inflation rate.

But the tight labor market means incomes and income growth are going to remain strong and support spending. That steady demand and ability to spend make price increases in many goods and services likely.

The recent increases in energy and food shifted demand from other items to them. Even so, prices rose almost across the board in the recent CPI reports. Prices rose at lower rates for most other items than they did for food and energy.

As food and energy prices peak, households will increase purchases of other goods and services.

Before the pandemic most purchases were for services, not goods. Back then, prices of goods were steady or declining while services prices steadily increased. Stable and declining prices in goods offset higher prices in services enough to keep overall inflation around 2% or less.

Households shifted to purchasing more goods during the pandemic. Recently, purchases began to shift back to more for services and less for goods.

But demand for goods still exceeds supply. Price increases for commodities and goods will be lower than they’ve been, but we’re a long way away from stable and declining goods prices. At the same time, service price increases will continue.

The data indicate that price increases for goods and commodities are likely to continue but at a lower rate than over the last year, while strong increases will continue for services.

The result is the rate of growth in the CPI will fall from the recent 8% annualized level, but it won’t return to 2%. Significant price increases are embedded in the economy. CPI growth will remain above the Fed’s target until the Fed takes significant measures.

U.S. Labor Market Peaking

Recently, I reported that a number of the people who retired early during the Covid-19 pandemic have been returning to the labor force.

That trend might have peaked, according to research reported in The Wall Street Journal.

The researchers surveyed a sample of labor force dropouts monthly during the previous year. The researchers concluded that about three million of the dropouts don’t plan to return to work at any point in the future. Some cite fears of becoming ill while others say they’ve developed physical impairments.

The work force dropouts also say they’re unlikely to continue a number of pre-pandemic activities, such as dining out and shopping in person.

If accurate, the survey indicates the labor force won’t return to its pre-pandemic levels anytime soon.

Recently, the number of employed workers was about 1.2 million less than before the pandemic. If the labor force had continued to grow at its 2015-2020 rate during the pandemic, it would have about 3.5 million more workers than it does today, the researchers estimate.

That means a continuing labor shortage. A smaller labor force generally means lower productivity and economic growth, as well as higher inflation over time.

The Data

The Housing Market Index from the National Association of Home Builders (NAHB) declined to 77 in April from 79 in March. A number above 50 indicates that more builders view sales conditions as good than view it as poor.

April was the fourth consecutive month the index declined from the previous month’s level after being above 80 for most of 2021.

Rising mortgage interest rates and supply problems reduced sales traffic and sales conditions. NAHB’s chief economist said the new home market is at an inflection point because housing affordability has decreased significantly.

Housing starts increased in March 0.3% above February’s level, which was revised higher from the initial estimate. The number of starts in March was 3.9% higher than 12 months earlier.

Starts for single-family homes decreased in March and declined 4.4% over 12 months. But multi-family home starts increased 26.2% over 12 months.

Despite the recent decline in starts, the number of single-family homes currently under construction is at its highest level since November 2006. The number of multi-family units currently under construction is at the highest level since May 1974.

The number of homes under construction is a bit misleading, because supply problems prevented many homes from being completed as fast as they would have in other years. Most of the single-family homes under construction already are sold. This isn’t speculative building.

Existing home sales declined 2.7% in March from February’s level and were 4.5% lower than 12 months earlier.

Sales have been hampered by a low inventory of homes for sale for some time. In addition, potential buyers are discouraged by rising interest rates and high prices.

New unemployment claims increased by 18,000 to 185,000 in the latest week. The previous week’s claims were the lowest since April 1968. The latest number still is well below the long-term average.

Continuing claims declined a little to 1.48 million. They also remain near the lowest levels in 50 years.

Retail sales increased 0.5% in March, the third consecutive month of increases. The sales numbers aren’t adjusted for inflation, so when prices increase significantly as they have in 2022, retail sales can increase even when consumers are purchasing fewer goods and services. When adjusted for inflation, retail sales declined by about 0.7% in March.

Gasoline sales increased 8.9% in March, due to price increases. Excluding gas sales, retail sales declined 0.3% in March.

That shows consumers are reducing other purchases to pay for essentials for which prices are increasing rapidly, such as energy and food.

Retail sales gains exceeded inflation in only three categories: sporting goods, electronics and general merchandise.

The Consumer Sentiment Index from the University of Michigan increased to 65.7 in mid-April from 59.4 at the end of March.

Despite the increase, the index was lower than in January and lower than in any month before 2022 going back more than a decade.

The Empire State Manufacturing Index improved significantly in April. The index surged to 24.6 from a negative 11.8 in March.

There were big increases in new orders and shipments. The prices paid index of the survey reached a record high, and the prices received index remained at a high level though below a recent record high.

Industrial Production increased by 0.9% in March following a 0.9% increase in February (which was revised higher from the 0.5% increase initially reported). Production in the manufacturing sector increased 0.9% in March, after a 1.2% increase in February.

The Markets

The S&P 500 rose 1.54% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 2.05%. The Russell 2000 increased 2.23%. The All-Country World Index (excluding U.S. stocks) added 0.26%. Emerging market equities lost 0.84%.

Long-term treasuries lost 3.03% for the week. Investment-grade bonds fell 2.20%. Treasury Inflation-Protected Securities (TIPS) declined 0.72%. High-yield bonds decreased 0.32%.

In the currency arean, the U.S. dollar gained 0.67%.

Energy-based commodities increased 2.29%. Broader-based commodities rose 2.16%. Gold declined 1.10%.

Bob’s News & Updates

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