Good Economic News is Bad News for Rates

July 7, 2023

Last week in Review: Good Economic News is Bad News for Rates

Last week, interest rates spiked on good economic news as fears of a recession fade. Let's discuss the big news of the week and gear up for important events in the week ahead.

The June Fed Meeting Minutes Out

"Some participants indicated they favored or could have supported raising the Target Rate by 25 basis points" FOMC Minutes June 2023 Meeting.

Last Wednesday, the Minutes from the June Fed Meeting were released. Seeing that the Fed paused hiking at that Meeting, markets were looking to see what Fed officials felt about the pause. The quote above highlights the sentiment by some at the Fed that rate hikes must continue. Why? This quote below:

"Those favoring an increase noted very tight labor market, stronger-than-anticipated economic momentum, little evidence of inflation being on a path to return to 2% over time."

Recession Fears Ease

The last revision to 1st Quarter GDP showed a shocking upward revision to 2.00% from a previously reported 1.3%. The important takeaway is this has dramatically removed the fear of recession in the near-term at least for now. This has also elevated the chance of a Fed rate hike at the end of July to nearly 100%.

Going forward, the economic data will be important to track to see if the economy remains as strong as it was in the first Quarter. Part of the bump in consumer spending was in response to a 8.7% increase in social security benefits, which are adjusted for higher inflation.

ADP Highlights Tight Labor Market

The ADP Report, which shows private (non-government) job creation for June came in at a shockingly high 497,000; more than double the 220,000 expected. This report, on the heels of the GDP reading and Minutes, was enough to push interest rates to the highest levels of the year.

Bank of England Seeing Higher Rates

And if all the good news above was not enough to pressure rates higher, we also watch expectations for higher rates in England pressure our rates as well.

Markets are now pricing the Bank of England to raise rates from the current 5.00% to 6.50% early next year. As rates go higher abroad, rates here in the US edge higher as well.

Bottom line: The "higher for longer" narrative from the Fed is now being supported by some of the data this week which has led to a spike in rates. In the coming weeks, we shall see if long-term rates are comfortable being elevated, or if they will come back down from these levels much like they did back in November.

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