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Middle East Conflicts

Updated: Oct 13, 2023

The terror attacks in Israel by Hamas and the resulting declaration of war by the State of Israel will likely be on investors' minds. The trauma and destruction the people are experiencing is incomprehensible to most US citizens. The US dollar (USD) is a safe haven during global distress. It has immense liquidity, "low" inflation (historically), and a stable government (still valid), making it an appealing investment when the world appears to be on fire.

After the attack, the demand for US dollars increased, which may have translated into lower bond yields. US and international investors may have increased their allocation to 10-year Treasurys, as yields decreased from 4.86% (10/6) to 4.65% (10/10). In one trading day, the yield decreased by 20 bps, which is very dramatic. The bond markets were closed for Columbus Day, hence the flat line.

Jobs, Unions & Inflation

Inflation: Inflation appears to be slowing, the Fed's favorite measure of inflation, Personal Consumption Expenditures (PCE), dropped to 3.876% in August. PCE does not include volatile expenses, such as food and energy. As the table below demonstrates, inflation has come down a lot. My primary concern is that the Fed’s mandate is to lower inflation to 2%. Many times, the last mile is the most difficult to achieve. If this is the case, the Fed may have no choice but to increase rates again. I don't believe they want to, especially during an election year, but they may have no choice.

Student Loans: Student loan payments resume this month. This could impact retail and casual dining as graduates will have less disposable income. Reduced spending should, in theory, help reduce inflation further.

Union Negotiations: Unionized workers only represent 11% of the United States workforce; however, when they negotiate significant pay increases, it trickles down to everyone else. The United Parcel Services (UPS) union did a great job, and by the end of the new five-year contract, full-time drivers will increase their compensation package from $145,000 annually to $170,000 annually. This significant contract makes it more difficult for other unions, such as United Auto Workers (UAW), to strike a deal. The UAW needs to negotiate something similar to save face.

Jobs: US job openings unexpectedly rose in August. American employers posted 9.6 million job openings in August, up from 8.9 million in July. Unfortunately, strong employment numbers make it harder for the Fed to beat inflation. It's not impossible, but it will take longer.

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