Rates improve this week providing a window of opportunity to buyers
Double, double toil and trouble, fire brew and cauldron bubble. Ok, so I played Witch #2 in our 8th grade production of Macbeth. What do you get when you brew a cauldron filled with the Fed showing signs that they are not in a hurry to raise interest rates, add in a dash of banter between Kim Jong Un and Trump, and just a pinch of concern over the economic well-being in Europe? You get better rates. The cauldron is heating up just enough to give us a bit of relief on rates and provide a window of opportunity to clients to take advantage. Here is what is happening:
- Start with the soup base; The Fed released the minutes from its April meeting on Wednesday and relief swept over the stock market as the Fed’s comments were interpreted as more accommodative than previous comments, possibly pointing towards less rate hikes at a slower pace than previously thought. They want to watch inflation and are willing to let it run a little hot. It is still highly likely they will raise rates at the June Fed meeting but it is my opinion the Fed will use any excuse it can find to pause on rate hikes. More on this in the commentary below.
- Now oil trading below $70 a barrel again providing some reduction in inflation concerns.
- Things continue to simmer between Un and Trump, with banter back and forth.
- More trade war chatter with China and talk of auto tariffs from Europe. Time to turn the temperature down a notch, we don’t want to boil over!
- To spice things up; In Europe, dismal economic reports and an imploding economy in Italy as well as growing concerns in Spain sends money running to the safest haven in Europe, the German 10 year bund. It’s like their version of our 10 year that we talked about at length in the commentary last week and its importance and impact on rates. So now watching the German bund and the 10 year US T-Bill. When money flows to the German bund it also flows to the US 10 year bond giving us lower rates overall.
- Also we tend to see money parked in the safe haven of bonds for long holiday weekends so we have that temporary support as well. Tuesday will tell us how much of the recent improvements were based on this factor.
So you see we have a perfect stew of events, and thus rates are improving. Soup’s on, get it while it’s hot! Too soon to say if this is any trend reversal- but it’s an opportunity for your clients. Next week we have some key economic data that could swing the rates either way really.
Housing news: I’m afraid nothing new here. April existing home sales came in at 5.46 million, lower than expected. New home sales for April also below estimates at 662k units. This should be the hottest time of the year for home sales and the numbers are not as strong as we would like to see. We know the culprits are shrinking inventory and affordability.
Commentary: The Fed will use any excuse to pause its rate hikes. The comments released this week from the last Fed meeting confirms this. I discussed in last week’s commentary that all the debt the Fed has issued at lower rates has started and will continue to roll over into higher rate debts as those debts come due. The interest cost alone on our debt is going to be in the trillions.
Despite the rhetoric out there that rates are going up, the Fed knows that this recovery was built on access to low rate credit. The Fed used low rates to create a wealth effect now at the expense of the future. Here is the good news; silver lining if you will. If you are in the housing industry, I believe the Fed will have to be SLOOOW to raise rates to delay the effects of what will happen as they raise rates.
Have a great holiday weekend!
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