A Look into the Markets - May 17, 2024

Provided by
Mark Snow, Guild Mortgage

This past week interest rates have reached the best levels in over a month. Let's discuss what happened and what news to watch next week.

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Last Wednesday, the highly anticipated Consumer Price Index was released. Back on April 10th, the previous CPI reading was reported hotter than expected and pushed interest rates to the highest levels of the year. As a result, the market was on edge heading into this report.

The good news? The report met expectations, as the headline inflation figure came in at 3.4% year-over-year. With the markets fearful of an even hotter number, the in-line reading gave the financial markets a sigh of relief. Why? If inflation were to re-accelerate, it would further push out a Fed rate cut.

We are not out of the woods yet as it relates to inflation, but this report did offer comfort that the next move from the Fed will indeed be a rate cut at some point. After this reading the chances of a Fed rate cut in September grew larger.

Consumer Slowing Down

Consumer spending makes up nearly two-thirds of our economy. This is important to know when following reports on the health of the consumer as it relates to Inflation, Federal Reserve policy, and interest rates.

Retail sales for April were reported and the reading was poor. Essentially, the consumer spent money on gas and groceries and little else. Moreover, when adjusting retail sales for inflation, the readings were negative, meaning the consumer is not buying more goods, but simply paying more.

Weak economic readings like this are bond-friendly and a big reason why rates improved last week.

Seeing real Retail Sales, or inflation adjusted Retail Sales turn lower has been a precursor to a recession in the past, so this is a report worth following moving forward.

Global Yields Lower

Also helping our interest rates are Central Banks around the globe telling the world that they will be cutting rates. It now appears the European Central Bank and Swiss National Bank are going to cut rates before the United States. This news prompted a decline in rates around the world and when that happens it puts pressure to push rates lower here in the U.S.

Bottom line: The case for a Fed rate cut sooner has grown, however further rate improvement may only come upon more reports showing inflation is indeed moving lower.

Looking ahead

Next week the Treasury Department will be selling debt to fund our government. These events always carry risks. With yields or interest rates at the lowest levels in a month, markets will be watching the buying appetite. If it is not good, rates will move higher. The opposite is true.

Also, out next week will be Durable Orders, Consumer Sentiment, and Housing Data.