U.S. consumer prices rose moderately in April but less than expected. Low inflation readings will keep a lid on bond yields, as well as reinforce the Fed’s position keeping short-term lending rates unchanged for the rest of the year. With inflation in check, some are opining for the Fed to lower interest rates. We tend to disagree and believe a wait-and-see position by the Fed is wiser, as there are some indicators that inflation may pick up and that ultimately these low inflation readings may be transitory.
In other important news, trade talks fell apart this week with China. This resulted in higher tariffs being placed today on Chinese goods imported into the U.S., which will likely lead to retaliation from China sometime in the near future. How these negotiations go is anyone’s guess, but the consensus is that a deal will be struck eventually. However, there is always a chance that negotiations could fall apart and a full-blown trade war will occur, or that these negotiations will drag on much longer than expected. Those fears, while remote, have helped push long-dated treasury bonds lower in what is known as a “flight to quality.” The trade tensions also dented equities this week as analysts reassess the effects of ongoing trade tensions on future economic growth and corporate earnings.
Low rates do benefit our borrowers and have spurred both a good home buying season, as well as our clients who have refinanced into lower rates. With the 10-year Treasury note trading under 2.500%, we remain biased toward locking in interest rates. Should the U.S. strike a trade deal with China, we could easily see rates move up from here.