Rates Move Lower Surprisingly As Inflation Data Picks Up
Treasury and mortgage bond yields dropped despite better than expected inflation data. This came as a surprise to some as the Fed and Treasury are doing all they can to spur inflation. They have indicated that their belief is that any inflation created by massive government spending can be controlled. While only time will tell, for the moment bond traders are believing what the Fed is saying, and that is why rates did not run away based on the hotter than then expected CPI data.
Equity markets and alternative asset classes love low rates. Stocks had a good week. Positive economic and earning data from banks continue to support the improving economy. Housing remains on fire and in fact, there is still a major housing supply shortage which should serve as a floor to housing prices drifting lower even if rates increase over time.
Inflating people’s savings through their investments in various retirement accounts is good for consumer psychology. We tend to spend more when we feel wealthier. During the pandemic, a lot of that spending has gone into home purchases and home improvement. Low interest rates also have put more dollars in people’s pockets which then gets spent on other activities.
Unemployment gains were down this week. While there remain concerns about Covid-19 abroad, ongoing vaccinations in the U.S. combined with the entire population getting closer to herd immunity are unleashing animal spirits. Restaurants are bustling, people are out and about, and the airlines are reporting more booked seats on flights. The economy will boom this year as long as the virus outbreaks remain contained as people learn to enjoy life while taking precautions. As the summer approaches, unemployment should continue to fall and the economy should recover to 2019 levels toward the end of the year.