In this week’s edition of Steady Investor, we dive into recent events and their impact on the market, including:
• Rising long-duration bond yields
• September CPI data
• Robust consumer spending
Rising Long-Duration Bond Yields Could Help the Fed’s Cause –10-year U.S. Treasury bonds have had a rough few weeks, with yields jumping by 61 basis points over the past two months (remember that as yields rise, prices fall). As seen on the chart below, 10-year Treasury bond yields have been going up since early 2020, as inflation pressures mounted and then later as the Fed embarked on monetary tightening that ended the era of ‘quantitative easing’ and pushed the federal funds rate to a 22-year high.1
10-Year U.S. Treasury Bond Yields
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Higher long-duration bond yields tend to have the effect of cooling economic activity since higher borrowing costs change business’s perspectives on new investment and spending. Insofar as the Federal Reserve would like to see overall demand in the economy soften – which in turn helps to alleviate price pressures – higher rates could in effect do the Fed’s job for them. Higher rates also add to the likelihood that the Federal Reserve could be done raising rates, since monetary policy is arguably already sufficiently tight. The final key to a Fed “pause” at the remaining two meetings of 2023 is inflation, which must continue trending downward in order for the Fed to confidently back away from raising short-term interest rates.
September CPI Data Shows Inflation Trending Modestly Downward – It wasn’t great news, but it wasn’t bad news either. In September, core CPI (which strips out food and energy) was up 0.3% from August and 4.1% year-over-year, an improvement from August’s 4.3% print. Core prices continue to trend lower, but the pace of decreases has moderated in recent readings. When including food and energy, CPI rose 3.7% from a year earlier. Importantly, when core CPI is looked at over a 3-month period, it increased at an annual rate of 3.1%, which is a substantial improvement from the 5% annual rate recorded in the spring.4
Older Americans are the Ones Driving Robust Consumer Spending – We often cite strong consumer spending as a key factor in fundamental economic strength, but rarely do we parse out how spending is rising or falling among different demographic groups. In doing so, one thing is clear: baby boomers are getting out there and spending. Americans age 65 and older accounted for 22% of total consumer spending last year, the highest percentage since records began over 50 years ago (see chart below). It’s also up significantly from the 15% of consumer spending which seniors accounted for in 2010.5
Consumer Spending by Age Group
There are a few factors to consider for why this is happening. The first is that there are just a lot of boomers. According to the Census Bureau, 17.7% of the population was 65 or older in 2023, the highest percentage going back to 1920. Boomers also have relatively stable and healthy finances, with little consumer debt, minimal student loan balances, and mortgages with ultra-low rates (or homes owned outright). Many are also just entering retirement, which is a time for less working and more spending. In August, 60+ year-old consumers reported spending +7.9% more than a year earlier, compared to a 4.6% increase for consumers under 40. Strong spending could get another boost in January 2024, when retirees will receive a 3.2% cost-of-living-adjustment to their Social Security checks.
Just as we cannot predict exactly how these stories will pan out, we also cannot predict life’s uncertainties when it comes to retirement planning. No matter how carefully you prepare for retirement, life’s unknowns can throw your plans off track.
But you can take steps to prepare yourself and help protect your secure and comfortable retirement.
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