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Rate Spike Attracts Buyers

April 19, 2024

This past week interest rates ticked up to the highest level since November on continued inflation fears. Let's discuss what happened and look at the important news in the week ahead.

Lack of Confidence

Federal Reserve Chairman Jerome Powell shared this on Tuesday:

"We've said at the FOMC that we'll need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy. The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence. Right now, given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us. If higher inflation does persist, we can maintain the current level of interest rates for as long as needed."

Essentially, Powell is saying recent inflation numbers are elevated, it's not clear that inflation is moving towards their goal, and they are going to keep rates higher for longer.

The bond market reacted poorly to this quote, with the 10-year Note spiking to 4.70%...the highest level of 2024.

The financial markets may also be losing "confidence" that the Federal Reserve can get inflation back down towards 2%, without the U.S. economy slipping into a recession because of "higher for longer" rates.

"Sell in May and go Away" Coming early?

Stocks did not like the spike in interest rates and endured a sharp selloff, sending indices to the worst levels since February. There is a saying in the financial markets, "Sell in May and go Away", where investors sell stocks during May to avoid the Summer months and repurchase stocks in the Fall. Maybe investors took this spike in rates and growing uncertainty as an effort to kick off this phenomenon a few weeks early. We shall see.

The Cure for Higher Rates

When interest rates spike like they have over the past week, at some point the higher yields attract investors thereby eliminating the increase in rates. We saw some of this as the 10-year Note hit 4.70% on Tuesday before falling to 4.57% by Thursday.

On Wednesday, in another sign that higher rates attract the buyers, the Treasury Department sold billions of dollars in 20-year bonds, and the buying demand was strong.

Oil Declining

We all know high oil prices are inflationary, and bonds hate inflation. Oil which recently hit $90 a barrel, declined down to $82 on Thursday. Lower oil prices were welcomed by the bond market and was another reason for some of the rate relief from 2024 highs.

Housing Impact

Housing Starts and Building Permits for the month of March came in well below expectations. With a market in need of housing inventory, this was an unwelcome weak signal as we enter the Spring housing market. With rates higher still in April, we may see home builders also express their "lack of confidence" that rates will come down.

Bottom line: With inflation fears elevated and the Fed backing away from a June rate cut, it is tough to see where the relief in interest rates would come from in the near-term. We will need to listen carefully to incoming data on signs that the inflation rate is cooling.



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