Farmers & Merchants Bank

Bond Market

The modest 0.1% advance of the bond market this week lifted the year-to-date figure to 2.9%. A lower-than-expected Consumer Price Index measure last week increased the likelihood of a second half of 2023 soft landing for the economy improving the outlook for corporate credit. Corporate bond spreads tightened on this news despite facing the start of an earnings season that is likely to show slowing earnings due in part to a headwind caused by the rising cost of debt. Another short-term headwind for corporate credit is an increasing amount of new issuance led by financial firms following the release of earnings last week and earlier this week.

Fed Meeting Next Week

Softer-than-expected U.S. producer prices (PPI) bolstered our expectation of only one additional Fed rate hike this year. The PPI rose just 0.1% in June and on an annual basis, the slowest pace in nearly three years. Excluding food and energy, the core PPI rose 2.4% from this time last year. This last look at inflation ahead of next week’s Federal Open Market Committee meeting shows that the Fed’s intended two percent inflation rate goal on the producer side is close to being achieved. However, core consumer inflation at more than twice this rate provides justification for a further rate increase next week.

Housing Market

A retrenchment in groundbreakings follows a surprise jump in the prior month’s figure as new home construction in June fell 8% to an annual pace of 1.43 million after a 15.7% jump in May. Applications to build, an indicator of future building, slipped 3.7% to an annual pace of 1.44 million. Despite the swings in figures, home starts are running at a pace above the pre-pandemic trend. High borrowing cost has not been a deterrent for new home builds as limited resale inventory and builder incentives have helped boost interest in new houses.