Mortgage Rates Rise As Economy Proves Resilient Amidst AI Mania
The recent surge in AI-focused technology companies has been caused by pure momentum. The soaring movement in these stocks raises concerns about a potential bubble. While AI is an exciting technology and its impact on businesses will undoubtedly be transformative, the current buying frenzy may lead to adverse outcomes for overvalued tech stocks. The combination of AI mania and the overall equity market rise may also give the Federal Reserve justification to raise short-term interest rates, once again. The betting market currently predicts a 60% chance of a rate hike in June. Despite tightened lending standards, the equity market exhibits resilience. Alongside an increase in PCE inflation data, the Fed will likely continue addressing inflation concerns. Given the persistent nature of inflation, a rate hike in June seems more probable than not, although we hope to be proven wrong.
The dichotomy between luxury and essential home purchases continues to define the housing market. Clients seeking homes under $3 million face multiple offers and even bidding wars for properties priced to sell. The hardiness of consumers and the overall economy is impressive. Nonetheless, the increasing demand for affordable housing, up to the upper-middle-class segment (homes under $2 million), necessitates attention. It is concerning to witness bidding wars in certain pockets of the market amidst economic uncertainty and epoch-making interest rates. Consequently, several homebuilder stocks are also reaching historical highs.
A Pivot In Purchasing Priorities
Inflation remains a persistent issue. Retailers like Costco have indicated that consumers are making more selective choices when purchasing bigger or more expensive goods. This is one sign that the average American is being negatively affected by inflation. Be that as it may, consumers are still willing to spend on experiences and travel to compensate for a prolonged lockdown. They instead reduce their purchase of items like televisions and washing machines. On the higher end, Restoration Hardware reported poor sales as customers pull back.
Mortgage rates have quietly and significantly increased, with some conforming rates exceeding 7.00%. While the AI hype dominates headlines, Treasury yields have made an equally notable move, but unfortunately not in favor of borrowers. The 2-year Treasury yield has risen over 25 basis points this week, closing at 4.56%. This substantial increase suggests that the bond market anticipates further action from the Fed. In early May, the 2-year Treasury was trading around 3.72%. This drastic shift in yields and the resulting implications deserve close attention. Additionally, the 2-10 Treasury spread has re-inverted to -76, an indicator often associated with recessions. The inversion of the yield curve should be monitored closely.
Currently, equities are driving the market, obscuring concerns about a potential debt ceiling standoff, overpriced tech stocks, or higher interest rates. It is a fascinating yet challenging time to analyze these market dynamics.