Market Commentary 05/31/2024

Rates Drift Lower As Inflation Data Matches Expectations

Despite a bumpy mid-week for bond yields, interest rates recovered following reports of slowing GDP and an as-expected PCE inflation reading. Additionally, a lackluster mid-week Treasury auction rattled the bond market, casting uncertainty amid ongoing US debt issuance. As discussed in previous analyses, a 10-year Treasury yield hovering around 4.50% appears justified with the current state of the job market, economy, and inflation. While the PCE number came in as expected, the real issue is inflation is not pushing lower and appears stagnant. 

High prices and interest rates have challenged housing affordability, resulting in declining home sales. Nonetheless, the recent surge in equities, particularly in the technology and AI sectors, has exceeded many market forecasts. This surge has notably impacted homebuyers in the $1.5M to $20M price range.

The unexpected rise in equities has contributed to a loosening of financial conditions, complicating the Fed’s stance on interest rate cuts. With the wealthiest 20% experiencing significant asset appreciation, including home and equity values, and high interest rates on their savings, the overall economic outlook remains positive. The consensus now points to one rate cut for 2024, a shift from earlier projections of up to seven cuts at the start of the year. In order to facilitate lower rates, one would need to see a worse-than-expected jobs report or some other major black swan. For now, the higher for longer projection remains intact.