US benchmark stock indexes traded mixed as a surge in inflation expectations pushed technology and communications services lower, outweighing the positive impact of the strong earnings from mega-cap banks.

The Nasdaq dropped 1% to 13,436.5, and the S&P 500 fell 0.4% to 4,334.4 after midday on Friday. The Dow Jones Industrial Average rose 0.1% to 33,667.8. Communication services, technology, and consumer discretionary led the decliners, while energy was the top gainer intraday

The University of Michigan’s preliminary consumer sentiment index fell to 63 in October from 68.1 in September, compared with expectations for 67 in a survey compiled by Bloomberg. Respondents saw one-year inflation expectations at 3.8%, up sharply from 3.2% in September and the highest since May 2023, while five-year inflation expectations rose to 3% from 2.8%.

Gold soared 2.8% to $1,934.6, and silver surged 4.1% to $22.88.

JPMorgan Chase (JPM) reported third-quarter results that topped market expectations, as the banking giant logged higher net interest income and lower credit costs. Shares jumped 3.9% intraday, the lead gainer on the Dow.

Wells Fargo (WFC) also reported better-than-expected results for the third quarter, as the lender benefited from higher rates and investments in its businesses. Shares advanced 3.9% intraday.

The US 10-year Treasury yield slumped 8.4 basis points to 4.63%, and the two-year rate declined 2.4 basis points to 5.05%.

West Texas Intermediate crude soared 4.1% to $86.41 per barrel on concerns supply will tighten after the United States increased enforcement of the price cap on Russian oil exports imposed following the invasion of Ukraine.

Meanwhile, Israel’s military warned more than 1.1 million civilians in northern Gaza to evacuate “southwards,” as the United Nations said the order for the mass evacuation was “impossible” without major humanitarian consequences, CNN reported. Hamas told residents not to leave their homes, the news report said.

Further, in company news, Dollar General (DG) shares surged 9.6% intraday, the top performer on the S&P 500, after the discount retailer re-hired Todd Vasos as its chief executive, nearly less than a year after he stepped down from the role. Additionally, the retailer lowered the top end of its fiscal 2023 earnings outlook while tightening its full-year sales guidance.

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Should I draw from my retirement accounts to pay for home improvements?© MoMo Productions/Getty Images

Key takeaways

• Borrowing from tax-advantaged accounts may end up costing you more than your original contributions.
• If you lose your job or move on to a different opportunity, you’ll have to pay your entire loan balance back by the due date of your federal tax return.
• You can borrow up to 50 percent — or up to $50,000 — of your 401(k) for home improvements.

Between market fluctuations, inflation and the interest rate hikes, funding your next home improvement project can seem like an impossible task. As a result, it may seem enticing to draw from the money you’ve already saved up; more specifically, your retirement savings.

While there are more immediate benefits to borrowing money from your retirement, there are long-term drawbacks that could be detrimental to your financial wellbeing come retirement. Whether you should draw from retirement to pay for home improvements is a personal decision, but carefully consider the long-term implications before making any decisions.

4 questions to ask yourself before using retirement for home improvements

That next project you’re eyeing, whether it be to improve your home’s curb appeal, increase the property value or finally create your dream kitchen, likely isn’t a cheap endeavor.

Regardless of whether you need to borrow a large chunk of change or are just filling in a financing gap, there are potential negative outcomes of using your tax-advantaged retirement account funds before you hit the penalty-free withdrawal period.

Here are four key questions that you can ask yourself to help determine if this is the right financial move for you and for your future-self.

1. What are the tax implications of dipping into my retirement savings early?

Any money initially withdrawn from your account for a 401(k) loan is  considered tax-exempt, regardless of your age. However, the real danger comes in if you’re unable to make the payments in the future.

The U.S. government imposes a strict income tax policy when it comes to dipping into a tax-advantaged account — like a 401(k) or an IRA — before the required age of 59 ½.

If you fail to make the payments or default on the loan, you’ll receive a 10 percent penalty tax on the amount of taxable distributions if you’re below the required age.

Plus, according to the IRS, you’ll have to include any untaxed distribution in your gross income the year you take out the loan on withdrawals made prior to the required age.

2. Do I have the funds to repay the loan and make contributions to my retirement?

On top of missing out on potential compound growth, unless you’ve saved up double of what you’re projected to need come retirement, it’s likely that you’re going to need to play a bit of catch-up to get back into good standing.

With a 401(k) specifically, you’re allowed to borrow up to 50 percent of your savings. However, some plans prohibit you from making contributions until the entirety of your balance is paid down. What’s more, loan payments aren’t considered to be contributions and won’t add to your current balance.

Even if your plan does allow you to make payments and you can comfortably pay down the loan and increase your contributions, you’ll still have missed out on earnings through compound growth on the amount withdrawn.

Finally, consider how far you are away from your desired retirement and use a contributions calculator to determine how much you’ll need to put away to retire comfortably. If you’re inching closer to your 50s, withdrawing is likely not the best option for you, no matter how much you take out. You’ll pay more in taxes and have a much shorter period of time to replenish those lost savings.

3. If I were to leave or lose my job, can I repay the balance in the required amount of time?

Even if you aren’t planning to leave your job anytime soon, it’s important to consider all of the potential future scenarios. Given that the average 401(k) loan has a repayment period of five years, if there’s any doubt in your mind that you’ll be at the same company five years from now, then it’s best to look elsewhere for funding.

While it does depend on the company you work for, most plans will require you to pay back your loan by the due date of your federal income tax return. Some companies may offer a short window as a grace period, but that’s not a guarantee.

If you can’t repay your loan within the required time, then your remaining balance may be taken out of your existing 401(k). This is known as a “loan offset” and is also subject to being taxed as income and the 10 percent withdrawal penalty for those younger than 59 ½.

Those who can’t make the payments also have the option of contributing the loan amount to a separate IRA account and have until the tax deadline of the following year to contribute the entire loan amount.

4. Will the home improvements add value to my home?

It’s not guaranteed that every home renovation or improvement project will increase the property value of your home. Keep in mind that the return-on-investment (ROI) percentage on a renovation is different from the increased home value.

For example, you could end up spending more on a project — like replacing your carpets or replacing all of the windows and doors — than it would increase your home’s value. However, there are some improvements that are more likely to add value to your home than others. Here are a few examples:

• Making energy efficient improvements
• Remodeling your bathroom
• Enhancing the exterior of your home
• Converting your basement into a living space
• Renovating your kitchen

When it comes to determining if a renovation will add value, there are multiple factors at play. For one, the current real estate market trends in both the nation and in your area play a large role in what improvements will fare well and what will fall flat.

There are also extenuating factors to take into consideration, down to the preferences of the potential buyers, the neighborhood and area your home is located in, the quality of the job and the materials used.

Renovations that may not add value to your home

If you’re making changes that are outside of the general characteristics of your home or neighborhood, then they’re less likely to boost curb appeal. For example, painting your house an unusual, bright color in a neighborhood of colonial-style homes with muted color schemes isn’t likely to enthrall most buyers.

As a general rule of thumb, it’s not the best idea to consider a 401(k) loan to make lavish or unique changes that bump the value of your home up to higher than the average market value in your area. If you have any questions or reservations about whether using a 401(k) loan is best suited for your specific project, speak with a local realtor familiar with the market or consult a financial advisor.

Pros and cons of using a 401(k) loan to fund home improvements

While most experts and advisers would likely advise against using retirement funds of any kind for this purpose, there are a few advantages that make it appealing to some borrowers.

Pros

• Initial tax and fee exemptions
• No hard-credit check
• May have lower interest rates than other loans

Cons

• Reduces compound growth
• Loan repayment may cost more than your retirement contributions
• Significant risks involved if you can’t make the payments or lose your job

When to dip into retirement for renovations

If you need the repairs done urgently or immediately, have the financial cushion to replenish your accounts come retirement and have considered the following options, then dipping into retirement may be worth considering.

• Home equity loans or HELOCs

Home equity loans and HELOCs (home equity lines of credit) dip into the equity you’ve built up in your home. Home equity loans are best for short-term, fixed projects while HELOCs function as a line of credit and are best for longer-term, more expensive renovations.

• Home improvement loans

Home improvement loans are personal loans that are designed specifically to be used on home improvement projects and related expenses. However, due to the current rates right now, personal loans may be an expensive route to take if you have lower credit.

• Cash-out refinance

For homeowners who are unable to afford an additional monthly payment on top of the mortgage and are financing a smaller project, a cash out-refinance may be the best option. It essentially replaces your current mortgage with a new, larger loan. However, you’ll likely need excellent credit to qualify and it’s only a good idea if you can secure a lower interest rate on your mortgage  than what you currently have.

• 0 percent APR credit card

Some credit cards offer interest-free introductory periods. Typically lasting between 12 and 24 months, these cards are only well suited for those financing a relatively small project that can be comfortably paid off within the 0 percent period. If not paid off within this time, the interest rates charged are typically sky-high, which will only push you further into debt.

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September 8, 2023 at 8:33 AM PDT

Federal Reserve officials are increasingly optimistic they can quash inflation without causing serious economic pain.

Encouraged by signs that price pressures and the labor market are gradually cooling, Fed officials are intent on not squandering their chance at an elusive “soft landing” by raising interest rates too much, even as they remain committed to returning inflation to their 2% goal. With that in mind, policymakers are preparing to hold rates steady at their Sept. 19-20 gathering, and may lift them once more if needed this year, amid a spate of strong economic data.

The balancing act is critical to the legacy of Chair Jerome Powell: Restoring price stability after a large inflation shock without a recession would be a rare achievement in modern policymaking, and perhaps temper criticism that he reacted too late to rising prices.

“Maybe the soft landing is really possible,” said Ellen Meade, a former senior adviser to the Fed board and a research professor at Duke University.

“They don’t want to communicate their excitement because financial markets will undo all they have done,” she added.

Having been burned several times by false dawns of disinflation, policymakers are wary of declaring a premature end to their credit-tightening campaign and are likely to retain a bias toward higher rates for some time.

The policy-setting Federal Open Market Committee has raised its benchmark federal funds rate 11 times since March 2022 to a range of 5.25% to 5.5%, the highest level in 22 years. Officials including Powell have emphasized that, as they near the end of their aggressive rate-hike cycle, they’ll proceed carefully and rely on the data to determine whether further increases are needed.

That puts the burden on incoming data to convince officials to lift rates beyond the restrictive level they’ve already achieved.

“We’ve gotten monetary policy in a very good place,” New York Fed President John Williams said Thursday at an event at Bloomberg LP’s headquarters in New York.

Reports in recent weeks have offered reassurance that the inflation fever is breaking.

The Fed’s preferred measure of underlying price pressures posted the smallest back-to-back increases since late 2020, a Bureau of Economic Analysis report showed last week. The core personal consumption expenditures price index rose 0.2% in June and July, down from an average of nearly 0.4% in the first five months of the year.

A separate Labor Department report last week showed job gains for June and July were weaker than previously reported, the jobless rate climbed and wage growth slowed, further signs of the labor-market cooling that Fed officials have been looking for.

Fed Governor Christopher Waller, one of the central bank’s most outspoken advocates for tighter policy, called it “a hell of a good week of data.”

“There is nothing that is saying we need to do anything imminent anytime soon,” Waller said in an interview on CNBC Tuesday, signaling he supports keeping rates on hold at the central bank’s next meeting. “We can just sit there and wait for the data.”

Officials will see one more key inflation reading before their September gathering when fresh consumer price data for August is released on Wednesday.

With low confidence in forecasts, inflation too high and the risk that overall growth continues above trend, policy hawks like Waller and Dallas Fed President Lorie Logan, as well as centrists such as Boston Fed President Susan Collins, are keeping a hike later this year on the table.

Still, Logan has sounded a more balanced note, saying policymakers “must proceed gradually.”

“The FOMC cannot safely throw bucket after bucket of cold water on the economy just in case inflation catches fire again,” she said Thursday at an event in Dallas. “If we did that, not only inflation but economic activity itself would soon be ‘cold out’ — which is not an outcome we want.”

Investors expect Fed officials will skip a rate increase this month, but see roughly even odds of another 25 basis-point hike at the Oct. 31-Nov. 1 meeting.

Policymakers will submit updated economic forecasts at their September meeting that will likely show broad agreement for one more rate increase this year.

‘Dramatic Slowdown’

For the soft landing to come together, Fed officials have said they need to see further slowing in the labor market and in overall demand.

Economists have been boosting their forecasts for quarterly gross domestic product following a string of stronger-than-expected reports, including consumer spending and residential investment.

Decelerations in Europe and China may provide a disinflation tailwind for Fed policy over the coming months.

“It cements in place a more favorable profile for goods inflation,” Michael Feroli, chief US economist for JPMorgan Chase & Co., said of China’s slowing economy.

Forecasts for US growth also suggest a step-down in output in the final three months.

Jonathan Millar, senior economist at Barclays Plc, said spending that was pulled forward into the current quarter will detract from the final three-month period, as will the resumption of student loan payments and tighter credit as Fed rate hikes continue to bite.

“We show a dramatic slowdown,” Millar said, with growth dropping to a 0.5% annualized pace from October through December. Even so, “we have been surprised again and again by just how strong GDP growth has been.”

That is in essence the Fed’s challenge. It has low confidence in its own forecasts, and with inflation still too high the option to tighten further has to be kept in place. Further restraint could snatch away the soft landing, which historically is “pretty rare,” Millar said.

When wrestling down inflation, Millar said, “the Fed tends to overtighten” right into a recession. That’s a mistake that officials are determined to avoid this time around.

Link to original article: The Fed Is Getting More Hopeful It Can Avoid a US Recession

Mon, August 21, 2023 at 8:20 AM PDT·3 min read

(Bloomberg) — The US bond-market selloff resumed Monday, driving 10-year yields to a 16-year high, as the persistently resilient economy has investors positioning for interest rates to remain elevated even after the Federal Reserve winds up its hikes.

The moves pushed up yields on typical Treasuries as well as those that provide extra payouts to cover inflation, signaling that investors are bracing for the risk that monetary policy will remain elevated.

The yield on 10-year inflation-protected Treasuries on Monday pushed over 2% for the first time since 2009, extending its ascent from year-to-date lows near 1%. Not long after, the yield on 10-year Treasuries without that protection surpassed October’s peak, climbing as much as 9 basis points to 4.35%, a level last seen in late 2007.

The jump extends the major shift that has raced through the bond market over the past two weeks as the odds of a recession recede and large federal budget deficits increase the supply of Treasury debt. That’s driven investors to sharply push up rates on longer-term debt, which had tumbled deeply below short-term ones on fears that the economy was poised for a contraction.

“The move higher across the curve over the last few weeks has really been all on the real-yield side,” said Zachary Griffiths, senior fixed-income strategist at CreditSights, citing a “higher Fed policy rate or better growth expectations, with little shift in breakeven inflation expectations.”

The 10-year real — or inflation-adjusted — yield has risen sharply from around 1.5% in mid-July and just above 1% earlier this year. On Monday, the 30-year real yield rose 6 basis points to 2.15%. Treasury market volume was 75% of usual activity and was potentially exacerbating the price action.

The movements have fanned expectations that the US bond market is closing the door on the post-financial crisis era of ultra-low rates, anticipating that the Fed will hold interest rates elevated for longer than markets had expected. The movement has come even as the swaps market is still pricing in that the Fed is likely done with its rate hikes and will be easing policy next year.

“The continued better-than-expected economic data has made it like we are almost contemplating a new reality that we haven’t had for quite some time, where rates could potentially be quite higher for quite longer,” Griffiths said. “That’s the big thing driving real yields.”

Bond investors are bracing for upcoming auctions of 20-year bonds and 30-year TIPS, that have smaller investor bases than other Treasury products. Demand will be closely followed for any hint the current rout is nearing an end, or perhaps has further room to run.

The debt sales arrive before the Fed’s annual gathering at Jackson Hole, with the market anticipating a hawkish tone from Chair Jerome Powell when he speaks Friday.

“The technicals are with the bond bears,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. But, he added, “in a slow August, illiquid holiday week, they have nothing to fear as the world expects Powell to be hawkish.”

–With assistance from Elizabeth Stanton.

A mixed bag of economic reports should shed some light on the economy’s health this week as the summer winds down.

First up on Tuesday will be the July report on retail sales. Economists are looking for a gain of 0.4% following June’s 0.2% increase. But since retail sales are not adjusted for inflation and gasoline prices have been rising, the report may not provide a full picture of how retail activity is faring and how strong of a bounce stores saw from back to school spending.

Economists expect that retail sales received a bump last month from Amazon’s Prime Day.

“Looking ahead, the outlook for the consumer is mixed,” Sam Bullard, managing director and senior economist for Wells Fargo’s corporate and investment banking group, said on Sunday. “On one hand, improving consumer confidence, moderating inflation and a still-tight labor market producing decent wage growth are a positive to resilient consumer staying power. Yet with more broadly tighter financial conditions, diminishing excess savings, slowing household income growth and the resumption of student loan debt service are likely to prove to be material headwinds to consumer spending growth in the coming months.”

A pair of reports on housing starts and permits out on Wednesday is likely to show strength in new construction as prospective homebuyers facing limited inventory of existing homes choose new houses instead.

As the Federal Reserve gets ready for its summer confab in Jackson Hole, Wyoming, Aug. 24 to 26, the release of the minutes from the central bank’s July meeting also on Wednesday will afford an opportunity to see how Fed officials saw the economic and inflation landscape ahead of the meeting where they raised interest rates by a quarter point but also hinted at a pause. The next Fed meeting occurs in September, by which time there will be fresh data on the state of the labor market and inflation.

“Consumers broadly have spent down their COVID-19 savings cushion, and that is illustrated by the increased levels of credit card debt and delinquencies, however with rising wages, low unemployment and plenty of jobs, the U.S. consumer has ample income-driven money to spend,” said George Ball, chairman of Sanders Morris Harris investment advisors.

The Blue Chip monthly survey of economists released on Friday still sees a recession on the horizon for the U.S. while acknowledging that economic growth has been surpassing estimates so far this year. Federal Reserve Chairman Jerome Powell last month said the Fed economic staff no longer had a recession in its forecast.

“The US economy is proving to be considerably more resilient than originally anticipated,” with real GDP rising to a larger-than-expected 2.4% quarter over quarter at a seasonally adjusted annual rate in the second quarter and up 2.6% from a year earlier, the Blue Chip survey from Wolters Kluwer found. It said that “domestic demand was a key factor behind growth” in the second quarter, with private sales to domestic purchasers contributing 1.95 percentage points, or 81%, to total GDP growth.

However, it cautioned that economists “still rate a recession as “very likely” in the near term, placing a 50% probability on a recession occurring within the next 12 months, down significantly from the 61% forecast in May.”

“Blue Chip economists attribute expected weakness in the U.S. economy to ‘anemic economic growth’ abroad, with 64% of panelists anticipating that recent weakness in European and Asian economies will slow the pace of the global economy,” it added.

Rounding out the week will be the leading economic index for July. Leading indicators have been flashing recessionary signals for a while now, but at the same time the economy has defied predictions of a downturn. The Federal Reserve Bank of Atlanta’s GDPNow estimate is for 4.1% growth in the third quarter though an update is due on Tuesday.

“We expect a recession to begin between Labor Day and the end of the year,” says Bob Doll, chief investment office at Crossmark Global Investments. “We’re sticking with that, maybe a mild recession.”

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