Financial and Economic News: September 27, 2023

business economy financial news Sep 27, 2023
Financial and Economic News: September 27, 2023

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Updates On the Shutdown

​​First things first, let's recap the latest on the potential government shutdown everyone’s talking about and how it could affect things in our economy.

Frankly, the US is in a tight spot as political tensions over the budget escalate. Representative Matt Gaetz, a prominent Republican, said this week that he’s pro- government shutdown if it means making changes to our current financial trajectory, which he believes is unsustainable. House Republicans are currently working hard to pass four spending bills, with several members, including Speaker Kevin McCarthy and other representatives offering tentative solutions. But the clock is ticking, and they might not make the month-end budget deadline. If they don’t, we could be looking at a government shutdown for at least two weeks. So, what happens then?

In the best case scenario: a government shutdown can be a bit of a silver lining because they tend to promote fiscal responsibility by reducing government spending. More often than not, this leads to a review of government programs and an effort to make them more efficient.On the other hand though, the worst case scenario could mean Americans are looking at a pretty sizable hit to GDP growth, consumer spending, and business investments. That’s because of things like job insecurity, market volatility, and more financial stress. In the long-run, a prolonged shutdown could lead to concerns about the United States' creditworthiness, and potentially result in a credit rating downgrade and higher borrowing costs.

So, although this seems to be a political issue, it’s important to keep a watch on how this affects the US economy too. The looming threat of a government shutdown highlights ongoing budgetary challenges and ideological differences within the US government, and it goes without saying that bipartisan cooperation is essential. I like to look at this as an opportunity for our political leaders to find common ground, and, if they’re able to resolve the issue successfully, it could lead to a balanced federal budget. All eyes are on this issue as we wait to see if a government shutdown can be averted.


 The Bond Market Dilemma

Next up, the bond market is at a critical juncture as 10-year Treasury yields surge to levels we haven’t seen in more than ten years. And with the Federal Reserve's signals of potential interest rate stabilization, it's no surprise investors are weighing the risks and rewards. To recap, shorter-term Treasury notes, particularly two-year bonds, are gaining favor with yields exceeding 5% for the first time since 2006. These shorter maturities could deliver reliable returns, especially if the Fed shifts towards rate cuts. However, on the flip side, longer-dated bonds pose increased risk due to a strong economy and heightened Treasury issuance. Those who do hold these long-term options are hedging a bet against the stability of the current labor market, which current data doesn’t necessarily support.

Before you choose where to put your investments, it’s important to remember that this year, treasury securities experienced a 1.2% dip, marking a third consecutive year of losses. Still, with rising borrowing costs that may restrict economic growth, there’s an argument to be made about the potential for longer-dated bonds.

For investors with a broader investment horizon, longer-term Treasury bonds may present promising yields, despite the ongoing challenges we’ve already discussed this week. So while short-term bonds offer a sense of security, longer maturities might be appealing for those with longer-term investment goals, but neither investment is without risk, so stay informed as you make those decisions.


 Stock Watch (How and Why What Happens Can Affect You)

Moving on to the markets this week: we saw stocks gain despite the government bond dilemma and the knowledge that there’s still no light at the end of the tunnel as to when interest rates might ease up.For individual investors, this market situation comes with a mix of opportunities and challenges. While stocks have shown gains despite uncertainties around government bonds and the timing of interest rate adjustments, it's essential for everyday investors to keep in mind just how much they can afford to risk in the current climate. 

This week, stocks like Amazon and Netflix have seen increases thanks to specific developments in the tech and entertainment sectors, but some consumer-focused companies, like Nike, have faced downward pressure. The Federal Reserve's efforts to control inflation could lead to another rate hike and higher borrowing costs, impacting mortgage rates and the overall cost of borrowing for individuals. Additionally, rising oil prices and government debt losses have driven up Treasury yields, potentially affecting bond investments. As I always say, as investors, you should carefully assess what you invest in, consider diversification, and stay aware of how economic indicators and Fed policies could affect you in the near and long term to make informed investment decisions.


Amazon’s AI Investment: 

Speaking of investments, Amazon is diving headfirst into the world of artificial intelligence with a hefty $4 billion investment in Anthropic. This move is all about boosting Amazon's capabilities in generative AI, and if you ask me, it's a pretty big deal. This partnership not only gives Anthropic access to Amazon's top-notch computing resources but also the financial muscle it needs for extensive AI model training. 

Their investment really underlines Amazon's commitment to broadening its horizons beyond e-commerce and cloud computing, and they might even try to use generative AI to supercharge customer experiences, by leveraging Anthropic's advanced AI models. What's interesting here is that Amazon's venturing into chipmaking territory. They're bringing in Trainium and Inferentia processors for machine learning applications. This move also shows Amazon's determination to keep up with the likes of Microsoft in the AI game.

So, what can we take away from this big-brain move? Well, for business owners who might be listening/reading, times are definitely tougher than they’ve been. My advice is to keep a close watch on expenses, explore new revenue streams, manage your finances wisely, and, most importantly, keep your customers satisfied. 

As for investors, or those who are thinking about the possibility of business, remember to think long-term too. That means don’t rush into decisions based on today's hot trends, and ask questions if you’re unsure. The most powerful thing you can invest in is your own skills, and that applies here too. Never stop expanding your knowledge about different investment opportunities and remember, adaptability is your ally in this ever-changing economic landscape. 

A New Gold Standard?

Next, up, let’s talk about what’s going on with Gold? Well there’s been some weird movement in the price of gold lately, and here’s what I think you should know. To recap, traditionally, gold's price moved in sync with interest rates, meaning it raised when rates were low, and vice versa. But what we’ve seen recently is that, despite surging inflation-adjusted rates, especially by those 10-year Treasury inflation-protected securities (TIPS) I mentioned, gold barely dipped 0.5%. Huh? But that means that the old correlation between gold and interest rates might not hold true in the wake of all the economic volatility we’ve been seeing. So what’s going on?

Well, for starters, central banks-specifically China’s-are buying up as much gold as they can to provide a safety net for its price, but at an individual level too, some investors see gold as a safe-haven asset in the event of a US economic slowdown, even when conventional wisdom would suggest selling. But despite its low yield, gold's premium has held for over a year. Is this the new normal though? I wouldn’t bank on it.

While the decoupling of gold from interest rates does raise important questions, there are reasons not to be overly concerned. First, remember that gold's behavior is influenced by a multitude of factors, and this shift doesn't necessarily mean imminent economic turmoil. Second, remember that central banks are actively buying gold, which provides stability to its price. And last but not least, investors see gold as a safe haven during economic uncertainty, which can be a sign of precaution rather than panic. So, the complex nature of financial markets means that changes in gold's behavior may not have straightforward negative implications for the broader economy, making it a situation to watch rather than fear.

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