consumer confidence Archives - Insignia Mortgage

Persistent Inflation and Weak Economic Data Rattle Equity Markets

This week, weaker-than-expected economic data, tariff uncertainty, and a rise in consumer inflation expectations pummeled stocks. In addition, consumer sentiment fell short of forecasts. It’s important to remember that confidence is the cheapest form of economic stimulus. As we have written for over two years, persistently high living costs and elevated housing expenses are wearing down everyday Americans.

The general public isn’t reassured by inflation returning to 2%. Cumulatively, prices have risen above 20%, while wages have yet to catch up. Consumer dollars simply aren’t stretching as far as they once did. A particularly worrisome signal comes from Walmart’s disappointing financial results, despite the retailer’s history of benefiting from consumers seeking better value. Some analysts speculate this could be a sign that consumers are nearing their breaking point, as inflation continues to erode spending power.

Bond yields responded as expected, with interest rates moving significantly lower later in the week. Treasury officials clarified their stance on issuing longer-dated bonds, easing pressure on the 10-year Treasury yield. Since most financial debt instruments—including mortgages, commercial loans, and auto loans—are priced off the 5-, 7-, and 10-year Treasury yields, this decline is a welcome development. With the 10-year Treasury below 4.50%, we anticipate mortgage rates to decline in the coming week.

As for the Fed, they remain in a wait-and-see mode. Recent inflation data suggests they may have acted too soon and too aggressively with their initial 50-basis-point rate cut. While short-term interest rates remain restrictive, they may not be restrictive enough to cool inflation. With markets holding up reasonably well, the Fed finds itself in a challenging position with both inflation and inflation expectations rising. The likelihood of additional rate cuts appears remote. If inflation data continues to come in hotter than expected, expect discussions around the potential need for a rate hike.

Declining Consumer Confidence Suggests Fragile Economy

We’ve perceived the economy as a mixed bag in the past year, diverging from the rosy outlook of many Wall Street economists. Although official employment and GDP figures indicate strength, the reality for many below the middle class suggests otherwise as individuals juggle multiple jobs to make ends meet. Inflation, often cited as a driver of nominal GDP growth, may be masking underlying economic challenges. This is evident in slowing sales for consumer-oriented businesses like McDonald’s.

Conversely, wealthier segments have thrived amid inflation, benefiting from appreciating asset prices and increased spending power. Nonetheless, recent consumer data suggests widespread struggles. Over the past 60 days, our mortgage brokerage and private lending business have witnessed a surge in requests for traditional and bridge financing, reflecting growing financial strain as the COVID stimulus wanes and inflation persists.

Now, the Fed faces a dilemma. Lowering rates risks exacerbating inflation, yet higher rates strain vulnerable citizens reliant on credit cards, mortgages, and loans. While a rate cut may be delayed until after the election, we’re increasingly optimistic about its likelihood, possibly in a significant manner. We foresee a Fed Funds Rate in the 4%-4.5% range by mid-2025, potentially bolstering the mortgage and housing markets and addressing yield curve inversion. Until then, the real estate sector must weather the storm.