<div class="entry-content">The yield on the US 10-year Treasury remains below its recent peak. A weaker-than-anticipated increase in consumer inflation for July bolsters the argument that the 10-year yield is likely to remain under 3% in the near future. A similar perspective can be drawn from today’s update of the fair-value ensemble model for this benchmark yield provided by CapitalSpectator.com.
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<p>* Fed officials state that <a href="https://www.reuters.com/markets/us/fed-now-seen-delivering-50-bp-hike-sept-after-inflation-eases-2022-08-10/">further rate hikes</a> are necessary despite a slowdown in inflation.<br/>* Traders have <a href="https://www.wsj.com/livecoverage/stock-market-news-today-08-10-2022-inflation-cpi/card/forget-that-75-basis-point-rate-increase-in-september-iE8AxtYzotYU0iL2Jk1B">lowered</a> their expectations of a 75-basis-point rate hike in September.<br/>* The Atlanta Fed’s GDPNow model <a href="https://www.atlantafed.org/cqer/research/gdpnow">increases</a> Q3 nowcast to a robust +2.5%.<br/>* Average gasoline prices in the US have <a href="https://www.nbcnews.com/news/us-news/us-gas-prices-fall-4-first-time-months-rcna42584">dropped below $4 a gallon</a> for the first time in months.<br/>* Ford's CEO <a href="https://www.cnbc.com/2022/08/10/ford-ceo-doesnt-expect-electric-vehicle-battery-costs-to-drop-soon.html">does not anticipate</a> a decline in electric vehicle battery costs in the near future.<br/>* High inflation could potentially increase Social Security payments by an average of $1700 in 2023, according to estimates <a href="https://www.cnbc.com/2022/08/10/social-security-cost-of-living-adjustment-may-be-9point6percent-in-2023.html">from July's data</a>.<br/>* The July consumer price data <a href="https://www.cnbc.com/2022/08/10/consumer-prices-rose-8point5percent-in-july-less-than-expected-as-inflation-pressures-ease-a-bit.html">indicates</a> that inflation may have peaked:</p>
<div class="entry-content">Preliminary estimates for US economic activity in the third quarter suggest mild recovery following two consecutive quarterly declines, according to the median from a set of nowcasts compiled by CapitalSpectator.com. Although this slight rebound is promising, caution is warranted as we are still early in the quarter. Nevertheless, some signs of relief seem to be emerging ahead of the government’s preliminary Q3 estimate, slated for release on October 27 by the Bureau of Economic Analysis.
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<p>* Russia has announced that oil deliveries to three Central European nations have <a href="https://www.nytimes.com/2022/08/09/business/russian-oil-druzhba-pipeline.html">been suspended</a>.<br/>* A recent war game results <a href="https://www.wsj.com/articles/war-game-finds-u-s-taiwan-can-defend-against-a-chinese-invasion-11660047804">indicate</a> that Taiwan can withstand a Chinese invasion.<br/>* China’s consumer inflation has <a href="https://www.bloomberg.com/news/articles/2022-08-10/china-s-consumer-prices-jump-adding-to-inflation-concerns#xj4y7vzkg">risen</a> to its highest level in two years.<br/>* Low water levels in critical European rivers may <a href="https://www.bloomberg.com/news/features/2022-08-10/europe-s-low-water-levels-threaten-rhine-river-hit-80b-trade-lifeline?srnd=economics-vp#xj4y7vzkg">disrupt</a> trade considerably.<br/>* US workers' wages continue to <a href="https://www.wsj.com/">increase briskly</a>, contributing to high inflation in the country.<br/>* The national average for gas prices in the US has <a href="https://www.marketwatch.com/story/why-are-gas-prices-falling-national-average-below-4-a-gallon-for-first-time-since-march-gasbuddy-11660067156">dropped</a> below $4 a gallon for the first time since March.<br/>* The rebound in value stocks is beginning to fade relative to growth stocks:</p>
<div class="entry-content">While forecasting market risk is generally more straightforward than predicting returns, as shown in the first part of this series, this does not mean it is simple. A basic model that uses the volatility of yesterday’s returns proves to be a dependable indicator for today. The pressing question is: how far into the future is it possible to reliably forecast this volatility using this simplistic model? The brief answer is that reliability diminishes rapidly.
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<p>* The FBI <a href="https://www.vox.com/policy-and-politics/2022/8/9/23297734/donald-trump-mar-a-lago-fbi-raid">searched</a> Trump’s residence at Mar-a-Lago.<br/>* Consumer inflation expectations have declined according to a NY Fed <a href="https://www.newyorkfed.org/newsevents/news/research/2022/20220808">survey</a>.<br/>* The Small Business Optimism Index has <a href="https://www.nfib.com/surveys/small-business-economic-trends/">increased</a>, although it remains below the 48-year average.<br/>* Housing sentiment in the US has fallen to its lowest level in a decade, as reported by Fannie Mae <a href="https://www.fanniemae.com/research-and-insights/surveys-indices/national-housing-survey">.</a><br/>* US housing inventory has <a href="https://www.bloomberg.com/news/articles/2022-08-09/home-listings-soar-in-cooling-us-housing-market?srnd=premium#xj4y7vzkg">increased</a> as prospective buyers withdraw from the market.<br/>* Market analyst Jim Bianco states that <a href="https://www.cnbc.com/2022/08/08/wage-inflation-used-car-prices-could-jump-higher-jim-bianco.html">reducing inflation will be challenging</br>.</a> * Public pension plans have <a href="https://www.wsj.com/articles/market-rout-sends-state-and-city-pension-funds-to-worst-year-since-2009-11660009928?mod=hp_lead_pos1">experienced</a> their worst annual performance since 2009.<br/>* The 3mo/10yr US Treasury yield curve remains, just barely, above zero:</p>
<div class="entry-content">US equities have risen for three consecutive weeks, leading among major asset classes based on a range of ETFs through the close on Friday (August 5). Conversely, commodities have struggled, experiencing significant declines last week.
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<p>* The Senate has <a href="https://www.cnn.com/2022/08/07/politics/senate-democrats-climate-health-care-bill-vote/index.html">approved</a> a comprehensive healthcare and climate bill.<br/>* China continues to <a href="https://www.cnbc.com/2022/08/08/china-announces-fresh-military-drills-around-taiwan.html">conduct military drills</a> near Taiwan.<br/>* In July, China’s trade surplus <a href="https://abcnews.go.com/International/wireStory/china-july-exports-rise-trade-surplus-record-high-88062302">reached</a> an all-time high.<br/>* The UN chief has <a href="https://www.cnn.com/2022/08/08/europe/ukraine-zaporizhzhia-nuclear-power-plant-monday-intl/">condemned</a> the "dangerous" shelling around a Ukrainian nuclear facility.<br/>* San Francisco Fed president <a href="https://www.bloomberg.com/news/articles/2022-08-07/daly-says-fed-is-far-from-done-yet-on-bringing-inflation-down#xj4y7vzkg">asserts</a> that the Fed is "far from finished" with rate hikes.<br/>* The world’s first climate-induced famine is reportedly <a href="https://www.ft.com/content/8fa3596e-9c6a-4e49-871a-86c20e0d170c">ravaging</a> Madagascar.<br/>* US payrolls <a href="https://www.nbcnews.com/business/economy/payrolls-increased-528000-july-much-better-expected-sign-strength-jobs-rcna41708">rose significantly</a> in July, far exceeding expectations.<br/>* The 10-year US Treasury yield rose last week, marking the first increase in four weeks:</p>
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<p><a href="https://www.amazon.com/After-Ivory-Tower-Falls-Politics_and/dp/0063076993?crid=ZD7NFM7XJCCV&keywords=After+the+Ivory+Tower+Falls%3A+How+College+Broke+the+American+Dream+and+Blew+Up+Our+Politics%E2%80%95and+How+to+Fix+It&qid=1659709383&sprefix=after+the+ivory+tower+falls+how+college+broke+the+american+dream+and+blew+up+our+politics+and+how+to+fix+it%2Caps%2C92&sr=8-1&linkCode=li3&tag=thecapitalspe-20&linkId=5cf16509ac897de97058220934c134bb&language=en_US&ref_=as_li_ss_il" target="_blank" rel="noopener"><img decoding="async" class="alignleft" src="https://ws-na.amazon-adsystem.com/widgets/q?_encoding=UTF8&ASIN=0063076993&Format=_SL250_&ID=AsinImage&MarketPlace=US&ServiceVersion=20070822&WS=1&tag=thecapitalspe-20&language=en_US" border="0"/></a><img loading="lazy" decoding="async" style="border: none !important; margin: 0px !important;" src="https://ir-na.amazon-adsystem.com/e/ir?t=thecapitalspe-20&language=en_US&l=li3&o=1&a=0063076993" alt="" width="1" height="1" border="0"/>● <a href="https://amzn.to/3QjeGYE">After the Ivory Tower Falls: How College Broke the American Dream and Blew Up Our Politics―and How to Fix It</a><br/>Will Bunch<br/><strong><a href="https://www.insidehighered.com/news/2022/07/29/new-book-links-americas-ills-failure-education">Q&A</a> with author via Inside Higher Ed</strong><br/>In his new book, Will Bunch, a Pulitzer Prize–winning journalist for The Philadelphia Inquirer, delves into the evolution of American higher education since World War II. He explores how it has both fueled and been fueled by the country's deep political and cultural divides. In a conversation with Inside Higher Ed, Bunch attributes many current societal issues—from climate change denial to the January 6 insurrection—to a "failure of education." Notably, he mitigates blame on the Federal Reserve, although he does suggest that the Greenspan Fed was hesitant to exercise its regulatory authority.</p>
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<p><span style="color: #ff0000;"><strong><a style="color: #ff0000;" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4080705">Combining Factors</a></strong></span><br/>Christoph Reschenhofer (Vienna University of Economics and Business)<br/><strong>July 2022</strong><br/><em>This paper explores how firm-level characteristics can be combined to create optimal factor portfolios, moving beyond traditional covariance-based methods (i.e., beta exposure). It shows that portfolios created from multiple characteristics tend to be less volatile and yield higher after-cost returns compared to individual factor portfolios and the market. The study also examines how varying buy and sell thresholds influences return, risk, and turnover preferences. Although it identifies optimal weights for each factor characteristic, it recognizes the 1/N factor portfolio as a challenging benchmark.</em></p>
