Inflation Falls Slightly, Mortgage Rates Edge Lower.
Finally, some good news. The Fed’s favorite gauge of inflation, Core PCE, rose at a slower pace than last month. While this number is still way too high, it did not rise above the April reading that wreaked havoc on the equity markets and spooked the bond market. Personal spending is still going strong, but customers are opting for cheaper-priced goods. This week’s market action – equity higher and bond yields lower – is a welcome break from one of the worst 4 plus months in the market’s history. Nonetheless, there are many headwinds to be mindful of. The Fed will begin quantitative tightening in June and is slated to increase rates in both of the next two meetings. Additionally, there is a lingering fear that this recent rally is what is causing a bear trap (a quick temporary move higher in the equity markets, only to reverse lower a short while later). This false technical indication inflicts painful losses on investors, pocketbooks, and the psyche. Home sales quickly slowing, consumers are dipping into savings, and I don’t foresee the Fed reversing course on interest rate increases any time soon. Inflation is public enemy number one and a huge burden on the least wealthy members of our society.
The Diamond in The Rough: Finding Value In The Current Market
Most of the experts I follow are more bearish in nature, with a target on the S&P of 3,800 to 3,900. This does not mean that one cannot find value during difficult market periods. For example, a nervous home seller is likely to be more willing to settle for a lower price. In this case, real estate brokers will follow suit and be inclined to negotiate more to make a deal happen. Tougher times create opportunities that cannot be forgotten. The same principles apply to other investments. You just have to be willing to do the work to find value.
As the WSJ and other financial papers write about rising mortgage rates, mortgage rates have quietly and quickly come down. The 2-10 year yield curve has also steepened a bit, providing relief to those worried about a recession. Inflation remains a wild card. Recent lock-downs in China have weakened its growth, which is also quite worrisome. All of these economic issues combined will keep markets on edge for quite some time. One could say that interest rates have gotten more attractive- when viewed in the context of their downshift. However, with the short end of the curve controlled by the Fed, I hold the belief that the direction of interest rates is higher. A 10-year Treasury at 3.500% would not surprise me in these coming months, especially if inflation recedes, but not as quickly as hoped for.