Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.
Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.
Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.
Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation.