🎙️ What Rate Hikes?

Not that anyone needed more evidence of “economic resilience,” but today’s gross domestic product (GDP) report shows the U.S. economy grew at a 2.4% annualized pace, well clear of a recession 👍

Strong consumer spending, a healthy labor market, and falling inflation have powered the trend. Noted Wells Fargo economists: “Today’s report raises the odds of a soft landing.”

— Matthew & Shawn

Here’s the rundown:

Today, we'll discuss the three biggest stories in markets:

• Why most Americans aren’t feeling higher interest rates yet

• Why Meta continues to soar in 2023

• Why Wall Street’s “Fear Index” is at lows

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

🤔 What Rate Hikes? Most Americans Still Have Low-Interest Rates (WSJ)

As mentioned in the intro, 2023 has been a puzzling year. The theme for this year has been unanticipated economic resilience in response to disruptive inflation and interest rates.

The logic goes like this: Inflation surges, so the Federal Reserve responds by raising its policy interest rate. Higher borrowing costs for banks and other financial institutions ripple through the economy, making things like mortgages, auto loans, and credit cards more expensive.

• The hope? Elevated borrowing costs disincentivize just enough spending for the economy to slow down, the forces of supply and demand to rebalance, price increases to cool, and things to return to “normal.”
  

• But when inflation surges at a record speed, and the Fed raises rates at a record pace in response, most expect the economy to do more than just cool down. Instead, the worry was that we’d dive into a deep recession.

That hasn’t happened. Why? Well, it’s sort of a technicality. Higher rates can change marginal spending habits, contributing to the slowdown we’ve seen in real estate already. Still, most Americans have been immune to higher interest rates, at least so far.

• Fidelity’s Director of Global Macro adds, “Why is the economy so resilient? One reason: A large swath of the economy has locked in low rates for longer…Family mortgages totaling $13.5 trillion are mostly immune to the Fed’s rate increases.”

People locked in rates for big expenditures during the pandemic at all-time lows. And low rates during the pandemic actually pulled forward future spending as people rushed to lock in ultra-low interest costs.

• The data company Black Knight estimates that Americans’ mad dash to refinance their mortgages across 2020 & 2021 saved them $42 billion in monthly payments.

Why it matters:

While buying a home now is more expensive, that isn’t weighing on the millions of households sitting on mortgages from before the Fed began hiking interest rates in 2022.

• Low-interest rates on things like mortgages and auto loans have been common since the 2008 financial crisis, meaning people have had many years to lock in low rates.

As folks wait to buy a new house or car, they won’t feel the sting of higher rates on their monthly expenses for those necessities. Of course, that phenomenon can’t endure forever, but it does explain why high rates haven’t crippled the middle class — most aren’t actually making payments on debt at current market interest rates.

Another 2008 remnant: Fixed-rate debt has become much more common, as lenders rely less on adjustable-rate mortgages, which helped fuel the housing crisis.

• In the first quarter, only 11% of outstanding household debt had variable interest rates that fluctuated with the market.

The result: A paralyzed housing market. Why move and give up a cheap mortgage unless you absolutely have to?

• One wealth manager called it a “weird limbo state.” Limbo or not, that’s better than a sharp recession.
  

• The bigger question is how long Americans can shield themselves from higher interest costs.

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📈 Meta Sees Ad Business Rebound & Revenue Surge (WSJ)

Mark Zuckerberg, colloquially known as “Zuck,” is having himself a year.

Facebook parent Meta platforms posted its highest quarterly sales growth since 2021, thanks to rebounding ad revenue. Ad revenue grew about 12% in the quarter, driven largely by AI technology that has enabled better ad-targeting after Apple privacy changes in 2021 cost the company $10 billion in sales.

But Meta’s “Year of Efficiency” has been defined by aggressive cost cuts. Meanwhile, spending in areas such as headsets and the Metaverse continues to surge. Zuck keeps betting big on himself, yes, but also on the idea that his company will emerge as the next major computing platform, not just a social media leader.

• Investors loved the earnings report, with shares rising again this week. They’re up about 150% year-to-date (YTD) as Zuckerberg has focused on cost-cutting, AI, and the launch of Threads, its competitor, to compete with the business formerly known as Twitter (X).
  

• Second-quarter revenue was $32 billion, up 11% compared with a year ago.

Remarked one analyst: “Meta’s year of efficiency is off to a strong start…Meta is still determined to make the metaverse a reality, and the massive losses in its Reality Labs division are adding up. The company also faces incredibly tough competition in generative AI, including from OpenAI and Google.”

• Meta still registered a net profit of $7.8 billion for the quarter, a 16% increase over a year ago and a jump from $5.7 billion in the first quarter.

Why it matters:

Threads is the latest innovation at Meta and the most successful product launch in company history, with 100 million sign-ups in just five days before the recent falloff. New features to the “Threads” app include an option allowing users to limit what they see to those they follow and translation services.

• Now, Meta has turned its attention to improving Threads user retention and improving other features. Only then will the company begin to profit from the app, per Zuckerberg.

Familiar playbook: Meta has utilized the same plan for Facebook, Instagram, WhatsApp, Stories, and Reels.

• “This is as good of a start as we could’ve hoped for,” Zuckerberg said.

All eggs in one basket: Meta’s revenue wouldn’t be categorized as diversified. For the quarter, advertising made up 98.4% of its revenue as it grew to $31.5 billion, despite its average ad price falling 16% year-over-year.

• Facebook user Facebook also said daily active users increased to 2.06 billion from 2.04 billion, or roughly one-fourth of the global population.
  

MORE HEADLINES

🇪🇺 European Central Bank hikes rates to highest level since 2000

✈️ Southwest Airlines hits record revenue, but costs keep rising

🛸 Whistleblower tells Congress the U.S. is hiding multi-decade program for reverse engineering captured UFOs

🥵 World set for hottest month ever as climate change sears planet

😴 Summer Lull for Stocks (Axios)

Time to chill: Summer slowdowns are real, even in the multi-trillion-dollar U.S. stock market. Investors, traders, analysts, economists, bankers, etc. all go on vacation, too.

• For the 18th straight day, the S&P 500 failed to move more than 1% in either direction.

Even after the Fed’s meeting yesterday announcing another rate hike — normally an event that can shake markets, the response was lukewarm. The S&P 500 ended Wednesday with its smallest move since 2014 on a day that the Fed announced a new decision on interest rates.

While the S&P 500 has climbed almost 19% this year, back to a stone’s throw from all-time highs, Wall Street’s “Fear Index” known as the Volatility Index (VIX) is at lows.

• The VIX reflects how much investors expect stock prices to move over the next month, known as implied volatility, and it tends to surge in times of great uncertainty, such as in March 2020.

Rather than surging to reflect investors’ nerves, the Vix is at its lowest level since February 2020 at 14, right before markets descended into Covid-fueled chaos, which sent the VIX over 80.

Why it matters:

What’s causing this? Well, cooling inflation and a resilient economy, as mentioned earlier, certainly help.

• Probably, though, it says more about markets in the summertime. As investment bankers hit the Hamptons for vacation, dealmaking activity, from mergers and acquisitions to IPOs and debt financings, slows down.
  

• That creates fewer big news events to move markets, and the same goes for companies as well.

OOTO: Between top executives taking their summer vacation all the way down to middle managers, decision-makers may largely be out of the office, or many of the people who report to them are.

• That slows down projects and generally pauses any major new initiatives companies may be considering, creating less market-moving stories that might spur volatility in stock market indexes.

See you next time!

That's it for today on We Study Markets!

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