Rocket Fuel Newsletter – 08/12/23

close up of male hands with newspaper and coffee

Rest easy, citizens of Lake Tahoe. Hank the Tank, a bear responsible for 21 home break-ins since 2022, has been captured and moved to a wildlife sanctuary.

In this edition, July CPI data is released, credit card debt continues to rise, and investors gain a little more confidence in the economy.

Fuel Up! 🚀

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Inflation Ticks Up Month-Over-Month
The Consumer Price Index (CPI) rose to 3.2% year-over-year, up from 3% in June. This came in slightly below expectations, but is still above the 2% target for the Fed.

The increase came predominately from the shelter category, which accounted for 90% of the rise. Records are being set in rental markets like Manhattan, which reported an average monthly rent of $5,588 in July; it’s the fourth time in five months that the rent record was broken in Manhattan.

Credit Card Debt Eclipses $1 Trillion
Credit card balances hit a high of $1.3 trillion in Q2, up nearly 5% from Q1, according to the Federal Reserve Bank of New York in its quarterly reporton household debt and credit. In total, total household debt is at just over $17 trillion, with mortgage balances accounting for 70% of that.

Can’t Beat This Waterfront Property
Looking to add a unique property to your real estate portfolio? How about a working lighthouse in Michigan’s Upper Peninsula?

As of writing, the current high bid is a mere $16,000!

Investors appear to be gaining confidence in the possibility of the market successfully pulling off a soft landing.

The Federal Reserve has been raising the Federal Funds Target Range for over a year, which has been steadily bringing down inflation. Other economic indicators such as unemployment and job growth also point to a healthy economy.

With the likelihood of a soft landing improving, investors are beginning to favor short-term investments over long-term investments. As a result, we are starting to see long-term bond prices drop and short-term bond prices increase. This is closing the gap between the 10-year and 2-year treasury yields.

While 10-year treasury yields are typically higher than short term yields, we have been experiencing an inverted yield curve where 2-year yields exceed 10-year yields since July 2022.

Lower Rates Dictate Behavior
As current rates continue to rise, the bulk of outstanding corporate and consumer debt are locked in at lower rates. According to the Federal Housing Finance Agency National Mortgage Database, 80% of homeowners with mortgages still have a rate below 5%, with nearly 25% of borrowers enjoying a sub-3% rate.

Similarly, U.S. companies are barreling toward a $1.8 trillion wall of maturing corporate debt. As this debt matures, companies will need to take out subsequent loans at the current, much higher rates. In the meantime, while companies and consumers continue to enjoy their existing lower rates and the economy remains strong, we can expect the Fed to keep current rates high.

In a higher rate environment, some mortgage borrowers prefer to take on a 15-year mortgage over the more popular 30-year mortgage. While each have their respective pros and cons, 15-year mortgages typically offer a lower rate, potentially saving borrowers hundreds of thousands of dollars over the life of their loan. On the other hand, the shorter term of 15-year mortgages requires a higher monthly payment.

Potential homeowners with existing student loan debt might also want to factor in the upcoming end of the Department of Education’s COVID-19 student loan forbearance program when choosing which mortgage product is right for them. Student loan interest will resume starting in September of this year, and payments will resume in October. While the average monthly student loan payment is estimated to be $503 per month, borrowers with existing student loan debt will need to budget accordingly.

Solvers were FAST last week! Twenty-four people finished last week’s puzzle in under a minute, and nearly half of those did so in under 30 seconds. Congrats to everyone’s great times, in particular Josh Wescott’s winning time of 14 seconds!

This week’s puzzle gets 3 Rockets out of 5. Click here to solve!