Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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The Consumer Price Index (CPI) declined 0.1% in December

“Consumer prices posted the first monthly decline in two and a half years in December, closing out 2022 on a positive note. While today’s headline decline in prices is a welcome sign of progress and will no doubt be taken as a signal that the Federal Reserve is succeeding in fighting inflation, it’s worth noting just how little progress has been made in the past calendar year. The consumer price index was up 7.0% in the 12-month period ending December 2021 and up 6.5% in the most recent twelve months.

No matter which way you cut it, inflation remains well above the Federal Reserve’s target of 2.0%. The largest driver of today’s decline came from the volatile energy sector, specifically the price of gasoline which fell 9.4%.  Stripping out energy and its other volatile counterpart, food prices, “core” prices rose 0.3%...

While [Thursday’s] report may be a welcome sign to the markets – make no mistake – the Fed is not out of the woods. Much of the progress we have seen in the past few reports has come from volatile categories like energy which could come bouncing back just as rapidly. Inflation has now migrated from the goods sector into services which is what we will be closely watching in 2023.”

Both stocks and bonds are off to a nice start to the year. The catalysts? In my opinion, there are two. The first is the continued easing of inflation measures. Thursday’s CPI report was the first decline in the headline inflation rate since the depths of the Covid pandemic. While it can be picked apart (see the article above), there is now a trend of weaker data that needs to continue in 2023 to officially move the Federal Reserve off its current tightening positioning.

The second catalyst has been a weaker U.S. dollar. See below.

Has the U.S. Dollar Peaked?



“The U.S. dollar advanced by nearly 50% against a broad range of currencies from its 2011 low to its recent peak in September 2022. The long-term bull market was propelled by the resilience of the U.S. economy, relatively high interest rates compared to other major countries, and safe-haven demand amid turbulence in global politics…

The dollar's recent pullback reflects a change in market expectations for the path and size of Fed rate hikes. After discounting a peak federal funds rate of 5% to 5.25%, the market is now pricing in a peak closer to 4.9% and rate cuts later in the year. Meanwhile, Europe and the U.K. are expected to continue hiking rates. Even the Bank of Japan is allowing its bond yields to rise modestly. As a result, the gap between U.S. yields and those in other major countries has fallen from about 2.4% to 1.7%...

For the dollar in 2023, we look for further downside in the near term, but expect it to stabilize by mid-year. A reasonable target would be the average of the range that prevailed prior to the pandemic, or about 3% to 5% lower.”

When the U.S. dollar rises, it is a headwind for U.S. multinational companies. There is the currency effect of converting sales from weaker international currencies to the stronger U.S. dollar, and exports become more expensive to international buyers. When the dollar falls, those conditions reverse.

The market impact of owning international stocks in their local currencies has the same relative currency effect. A strong dollar makes them worth less, and a weak dollar makes them worth more.

See the Chart of the Week below where a fall in the dollar index of 10.5% since September 27^th has resulted in the developed international stock index (MSCI EAFE) rising 24.5%.

Current State of the Housing Market; Overview for mid-January

New Listings Have Declined Significantly

Realtor.com’s December Housing Trends Report showing new listings were down about 21% year-over-year in December...

30-Year Mortgage Rates Declined from October Highs

30-year mortgage rates were at 6.15% on January 11^th, down from over 7% for most of October… The payment on a $500,000 house last year, with a 20% down payment and 3.5% 30-year mortgage rates, would be around $1,796 for principal and interest. The monthly payment for the same house, with house prices up 9% YoY and mortgage rates at 6.15%, would be $2,656 - an increase of 48%! Even though mortgage rates have declined recently, monthly payments are still up sharply year-over-year...

House Prices

Reported YoY house price growth is still solid, but the Case-Shiller National Index slowed to 9.2% YoY in October. The October Case-Shiller report is mostly for contracts signed in the June through September period when 30-year mortgage rates were mostly in low-to-mid 5% range except in September when rates moved up to the low 6% range. The impact from higher rates in October and November will not show up significantly in the Case-Shiller index for a couple more months...

Conclusions

We are seeing a significant year-over-year decline in the housing market with fewer sales and more cancellations. We are just starting to see the impact on house prices. And even with a sharp decline in new listings, inventory is increasing YoY...

Housing is the industry that is most negatively impacted by the Fed raising interest rates. Keep in mind that housing data operates on major lags due to the time to close on a house, as well as major seasonality. However, the numbers are still bad and may get worse.

Since the U.S. dollar started to decline in late September:

• +9.65% U.S. Large Companies (S&P 500)
• +24.50% Developed International Markets Companies (MSCI EAFE)
• +14.18% Emerging International Markets Companies (MSCI EM)
• +17.94% Gold (SPDR Gold ETF GLD)

Everything is up, but developed international stocks have been the biggest beneficiary (due to the currency conversion effect).

If 2023 is the year of U.S. dollar weakness, this trend could continue.

Thanks for reading. Have a great weekend!

RBG Wealth Advisors LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.