Interest Rates Ease as Inflation Data Meets Expectations

Despite a volatile mid-week for bond yields, interest rates have steadied following reports of slowing GDP growth and an expected PCE inflation reading. Additionally, a weak mid-week Treasury auction caused unease in the bond market, adding uncertainty amid ongoing US debt issuance. As previously discussed, a 10-year Treasury yield around 4.50% appears justified given the current conditions of the job market, economy, and inflation. Although the PCE number matched expectations, the main concern is that inflation remains stagnant rather than declining.

High prices and interest rates have made housing less affordable, leading to a decrease in home sales. However, the recent surge in equities, especially in the technology and AI sectors, has outperformed many market forecasts. This surge has significantly impacted homebuyers in the $1.5M to $20M price range.

The unexpected rise in equities has loosened financial conditions, complicating the Fed’s position on interest rate cuts. With the wealthiest 20% seeing substantial asset appreciation, including home and equity values, and benefiting from high interest rates on their savings, the overall economic outlook remains positive. The consensus now suggests one rate cut for 2024, a shift from earlier expectations of up to seven cuts at the start of the year. To achieve lower rates, a worse-than-expected jobs report or another major black swan event would be necessary. For now, the higher-for-longer projection persists.