SETTING STAGE FOR CUTS

In August, prices in the U.S. saw an expected increase, while the annual inflation rate reached its lowest level since February 2021. The consumer price index, which provides a broad overview of goods and services costs in the U.S. economy, showed a 0.2% increase for the month. The 12-month inflation rate was reported at 2.5%, a decrease from the previous month’s figure. Meanwhile, core inflation, which excludes volatile food and energy prices, saw a slight increase of 0.3%. This development has set the stage for a probable quarter percentage point rate cut by the Federal Reserve, with an 85% likelihood according to market indicators such as the fed funds futures market. Nonetheless, it is worth highlighting that despite the overall moderation in inflation rates, housing-related costs have remained an area of concern, especially with the shelter component of the consumer price index rising by 0.5%.

POTENTIAL DESPITE WITHDRAWALS

Bitcoin ETFs in the U.S. have recently experienced a decrease in their value, prompting investors to withdraw a significant amount of money. However, financial experts, including those at Bloomberg, view this as a natural occurrence, indicating healthy market growth. Despite losing around $1.2 billion between late August and early September, this only represents a small fraction (3%) of the total value of the ETFs. Thus, experts have emphasized the importance of efficiently managing withdrawals during uncertain times, noting that the ETFs have demonstrated good control over this aspect. Moreover, it is worth noting that when the ETFs initially began trading, they attracted approximately $12 billion in investments, which signals a strong investor interest, and although recent withdrawals may seem concerning, this influx of capital at the outset demonstrates a positive outlook for Bitcoin ETFs, suggesting that despite fluctuations, they hold promising potential for the future.

THE DECLINE CONTINUES

Last week, mortgage rates continued to drop, marking the sixth consecutive week of decline, with the average interest rate reaching its lowest level since February 2023. Factors contributing to the decrease in rates include cooling inflation, a slowing job market, and expectations of an impending rate cut by the Federal Reserve. Meanwhile, refinance applications experienced a modest 1% increase compared to the previous week, but showed a noteworthy 106% surge from the same period last year, even though the absolute number of refinances remains historically low. Applications for purchasing homes also saw a slight uptick of 2%, although they were still down by 3% compared to the previous year. Moreover, it is worth remarking that despite the favorable trend, mortgage demand did not see a significant increase, as total demand only rose by 1.4%, and challenges related to affordability and limited housing inventory could be influencing the slower growth in purchase applications.

SURGING AHEAD

Real estate investment trusts (REITs) are currently outperforming the market, with ETFs like USRT and RWR returning over 20% in the past year – a significant improvement from previous years. The strong performance of REITs is attributed to favorable expectations of decreasing interest rates, with yields of about 3.1% for iShares REIT ETF and 3.4% for the SPDR REIT ETF. Additionally, positive developments in the real estate sector are contributing to the growth potential of REITs. Moreover, experts consider the current trend as a positive development, and many have stated that is a shift towards “opportunistic diversification”. Furthermore, many recommend focusing on quality REITs, particularly in sectors like housing and apartments, as they yield about 2.6% and 3.6%, respectively. Overall, the average Buy-rating ratio for top-performing REITs is around 75%, which is significantly higher than the average for REITs in the S&P 500.

ETF CONVERSION

Morgan Stanley is undergoing a significant transformation by converting two of its Pathway-branded equity funds, worth billions of dollars, into Exchange-Traded Funds (ETFs). This strategic move, revealed in an August 20 filing with the Securities and Exchange Commission, is driven by the desire to capitalize on the advantages of actively managed ETFs within their wealth management model portfolios. Scheduled for completion on November 15, the conversions will see the newly minted ETFs trading on the New York Stock Exchange starting November 18. The decision to make this shift is based on several factors cited by Morgan Stanley, including the potential for more favorable asset growth, increased trading flexibility, enhanced transparency, and improved tax efficiency. It is worth noting that shareholders need not take any action, as their mutual fund shares will automatically transition to ETF shares of an equivalent total dollar value, a process approved unanimously by the board of trustees. In addition, there are no planned alterations to the underlying sub-advisors or investment guidelines as part of the conversion. Moreover, let’s remark that presently, Morgan Stanley manages 15 ETFs with assets totaling $2.5 billion, showcasing a diverse range of strategies under the Calvert, Eaton Vance, and Parametric brands.