Stocks rose and bond yields worsened Friday despite slower than expected U.S. economic output. The miss in 4th Quarter GDP, which rose 2.600% below the 2.900% expected, was largely a result of U.S trade imbalances. However, within the report, consumer spending grew at the fastest clip in two years. Business spending also surged and December Durable Orders grew by 2.9%, well above the 0.9% expected.
The rise in the stock market Friday has more to do with Mr. Market looking ahead at 1st quarter GDP readings and how the added business tax cuts from this past year’s tax reform will affect future growth. Bonds also appear to be adjusting higher in anticipation of consumer and wage inflation. Inflation is the archenemy of low interest rates. With the 10 Year Treasury Note breaking through the 2.62% ceiling of resistance, this now becomes our new support level and it will take significant negative news to push yields below 2.62%
With the rip-roaring equity rally that we are witnessing, we are biased toward higher interest rates and continue to advise clients to lock in interest rates. It is important to note that lenders are still offering adjustable rate mortgages (ARM’s) in the low to mid 3 percent range and 30-year mortgages are still in the low 4 percent range. By historical standards, interest rates remain very attractive and the move higher in rates should not adversely affect home buying decisions.