A Welcome Sign of Relief on the Horizon
I believe I speak for all in my profession that Thursday’s better-than-expected inflation reading and subsequent broad rally in bonds and equities was a welcome sign of relief. However, let us not forget that a one- or two-day rally does not make a trend. Inflation is still at 7.70% (but hopefully moving lower), the economy is weakening as layoffs mount and geopolitical tensions in Europe and Asia remain high. The CPI report did take some pressure off of the Fed to continue to move in 75 bp increments, to a more measured approach of 50 or hopefully only a 25 basis point increase. The Fed wants the entire yield curve to be restrictive, which means making interest rates higher than inflation. The reading the Fed prefers, the core PCE was around 5% in November. Therefore, the Fed’s work is probably not done, but fears of rates touching 6% or so have been taken off the table.
Crypto Collapse – Gold Rallies
One of the great ironies this week was the absolute collapse of cryptocurrencies as more traditional asset classes such as gold rallied impressively. Crypto is a trillion-dollar asset class (down from 3 trillion) and may still pose some systemic risks. This may have also been attributed to the massive rally in bonds on Thursday with the so-called “flight to quality trade”.
A move lower in interest rates will help boost home sales and commercial real estate transactions. The rate of change in interest rates really hurt the marketplace. Should interest rates continue to fall and should the 10-year settle in at the 3.500% range, a pickup in transaction volume will follow. Also, equities (not meme and high beta stocks with no earnings) have retraced a good amount of their losses which should bode well for consumer confidence assuming the rally sticks.
