Economy and Interest Rates Present Mixed Signals
Interest rates surged late in the week with the release of the alarming UK and Germany inflation data, especially within the context of a slowing economy. Mixed economic signals in the U.S. did not help markets either with slowing GDP or rising weekly unemployment claims. Nonetheless, there were some good manufacturing reports and a better-than-expected retail sales report. Existing housing sales softened again, resulting in home builders’ confidence being dismal. Housing starts also fell. Since housing is a major component of the economy, the current housing industry status is not positive.
The Fed and The Average American Head Towards Black Swan Event
The inability of the S&P to break through the 200-day moving average is challenging the bullish narrative. Also, Fed speak, in my opinion, shows no signs of easing. Inflation is a problem, and it must be dealt with. Talks of 75 bp rate hikes by Fed officials as well as the start of 95 billion balance sheet run-off per month are not accommodative. These discussions also raise the possibility of a black swan type of event. However, not dealing with inflation now results in harsh problems for the average American. When food and life’s basic essentials become unaffordable to many, the government loses creditability. This is what concerns Fed officials the most.
Real estate activity has slowed, but every market presents opportunities. Buyers are becoming increasingly more aggressive in negotiating with sellers. The combination of higher mortgage rates and tighter lending guidelines makes qualifying for a mortgage tougher. Thankfully, niche lenders are returning to fill in the gap. Adjustable-rate mortgages and interest-only products are in demand to offset the rise in mortgage rates.
Next week’s Jackson Hole symposium will be watched closely as central bankers, economists and the Fed chairman gather to speak about the economy and fiscal and monetary policy. Stay tuned for this.