Weekly Good Reads: 5-1-1
Fed's Pause, new Dot Plot, Asset Bubble, and Secrets to Life
Welcome to another issue of 5-1-1! I am Marianne O, an investment professional and author of The Learner’s Mind on investing, economy, and wellness ideas. For this Weekly, I include 5 links to relevant economic and investment news, finance, and wellness/idea pursuit based on what I read. I also include 1 important chart and 1 investment term to know. You can easily subscribe to my newsletter by clicking below.
Market and Data Comments
U.S. Fed paused its interest rate hike and maintained the Fed Funds target rate at 5% to 5.25% on Wednesday after the FOMC meeting. The median projected Fed Funds rate from the Dot Plot (see One Term below for more explanation) at the end of 2023 increased from 5.1% projected in March to 5.6% (end-2024 at 4.6% and end-2025 at 3.4%), signaling the committee expects 2 more rate hikes this year.
No committee members want a rate cut this year; one member projected a year-end rate of 6.1%! This is the biggest takeaway, in contrast to what the market believed. For end-2023, median core PCE inflation, Fed’s preferred inflation gauge, is expected to increase to 3.9% (March, 3.7%). By 2025, core PCE is expected to reach 2 to 2.4%. The Fed is determined to return inflation to the 2% target. The slightly good news is median projected year-end real GDP will be around 0.7% to 1.2% and the median unemployment rate at 4 to 4.3%, both improving from the March projection.
Market-wise, the 10-year minus 2-year Treasury yield curve fell (became more inverted) to 93bp (2-year rate at 4.7% and 10-year at 3.77%.) This signals an economic slowdown as the long-term rate is lower than the short-term rate, which is peaking.
While all focus was on the Fed’s battle with inflation, Bloomberg wrote the real problem in America is that it is turning into an oligopolistic economy that marginalizes a big part of its population (see chart below). The top 1% could account for 22.5% of the nation’s income, a peak since 1928. Worst, the median income of the poorest 10% will likely decline based on the extrapolation.
’s piece on the problem of San Francisco reflects a microcosm of this problem. The issue was complicated by inadequate/insufficient public policy and housing infrastructure to accommodate the tech boom time.
The ECB in Europe recently hiked 25bp and committed to hiking rates again in July, but weaker growth will likely cause the ECB to stop hiking rates afterward. The U.K. is expected to hike 2 more times at 25bp each to a peak of 5.5%, according to Barclays.
China, however, cut its reverse repo rate by 10bp to 1.9%, with more to come, as the April and May industrial activities were weaker than expected. The rest of the emerging countries appear to have finished with their tightening cycle.
Key economic events/data to watch next week include Fed chair Jerome Powell giving his semi-annual testimony before the U.S. Congress and the composite PMI index for the Euro Area and the U.K. Watch what may come out of Anthony Blinken’s visit to China this week (first U.S. Secretary of State visiting China since 2018).
Economy and Investments (Links):
Citadel’s Ken Griffin Optimistic on Growth in China (FT) - He mentioned China and the U.S. are the top 2 destinations for innovation for global investors. (Wonder how significant China is as an engine of world growth? Since the end of 2007 and the beginning of the financial crisis, China contributed 41% of the changes in the World GDP growth in U.S. dollars (World Bank data)).
Hong Kong Needs More Welders, Not Bankers (Bloomberg or click here) - HK carries similarities in the labour market to the U.S. - a recession for white-collar but a boom in blue-collar.
Finance/Wealth (Link):
Asset Bubble Red Flags and the Rise of AI (Mark Higgins’
)
The author used history to shine a light on current events. To evaluate whether there is a bubble of AI or not, he recommended being aware of (1) untested investment gurus making all sorts of predictions (2) launches of theme-based or specialty funds like “Generative AI”, and (3) any inclusion of new indices on a financial journal webpage.
Wellness/Idea (Link):
When stumped by a life choice, choose “enlargement” over happiness.
🔅Endure short-term discomfort if that decision will make you grow.
One Chart You Should Not Miss: Gartner Hype Cycle for Emerging Technologies in Finance, 2023
The Gartner Hype Cycle graphically depicts the maturity lifecycle of new technologies and innovations. It has 5 phases: Innovation Trigger, Peak of Inflated Expectations, Trough of Disillusionment, Slope of Enlightenment, and Plateau of Productivity. It guides business executives on how technology can evolve and where resources can be deployed to improve the company’s business processes.
Below, Garner presented the Hype Cycle for Emerging Technologies in Finance for the first time, highlighting the concept of autonomous finance, which means adopting AI and machine learning to automate day-to-day finance functions such as budgeting, investing, and risk management. From the chart below, many areas of applications are still in the Innovation Trigger phase. This includes the much-talked-about Blockchain in Finance.
One Term to Know: The Fed’s Dot Plot (or click here)
The Dot Plot shows a rough trajectory of what senior Fed officials (anonymously) think the benchmark interest rate will be at the end of the current year and in the next two years. Since January 2012, the Federal Reserve has updated the Dot Plot every three months.
This is the Fed’s way of telling the market what they think beyond the recent Fed meeting. The key is to monitor the shift in the committee’s view (median and extreme points) since the previous projection. This is NOT Fed’s commitment or the actual interest rate path. Moreover, only 5 out of the 12 Fed governors hold voting power, which can sow confusion for the market participants about the practical use of this Dot Plot.
Please do not hesitate to get in touch if any questions! If you like this weekly, please share or subscribe to my newsletter.
P.S. If you have not tried out Generative AI such as OpenAI’s ChatGPT or Google’s Generative AI, please do. Your research productivity will kick up several notches!