Recently, the financial landscape has witnessed a fair bit of turbulence. Mortgage-backed securities are dwindling, and the 10-year treasury is on an upswing. This upheaval is primarily attributed to the banking sector’s dire need to raise capital due to an unfolding crisis and heightened fears around the looming debt ceiling.
Even as inflation rates stay within manageable bounds, the bond market bears the brunt of large-scale sell-offs to enhance liquidity. Furthermore, the need for more ready buyers aggravates the situation as market makers grapple with executing bargain prices.
The economic radar needs to be more evident by the Federal Reserve’s recent pronouncements. While the banking sector is contracting its lending, policymakers continue to favor a rate hike. This divergence between ground reality and policy prescriptions is indeed alarming.
Interestingly, amidst this chaos, the Leading Economic Indicators (LEI), a reliable forward-looking indicator, has displayed a persistent contraction for the 13th month. Even the Conference Board, the publisher of LEI, has warned of a potential slowdown in the current quarter, anticipating a mild recession by the year-end.
Considering the LEI’s track record, this downturn could be the heralding of a looming recession. Given the dwindling excess savings and the waning impact of the stimulus, we may be on the cusp of an economic downturn.
Yet, amid these bleak predictions, there is a silver lining. The Shelter cost, a significant factor in the cost of living, is witnessing a decline year-over-year. With favorable inflation comparisons starting May 10th, we might expect interest rates to follow suit.
In the coming week, we will have various housing data to digest. New Home Sales data is due on Tuesday, followed by Pending Home Sales and the Q2 GDP preliminary reading on Thursday. Friday’s Personal Consumption Expenditure will be the most crucial, the Fed’s favored inflation measure.
Given the recent market volatility, all eyes are now on the Fed’s stance on the rate hike issue. The chances of a rate hike at the Fed’s meeting on June 14th have surged to 40%, a significant leap from the near-zero probability just a short while back.
In light of these developments, we will closely monitor the statements of Jerome Powell, the Federal Reserve Chair. Depending on his tone, we may see the bond market sigh of relief. But for now, given yesterday’s lock, we’ll continue to float and respond quickly if an advisory to lock becomes necessary.
Despite the uncertainty, remember that periods of volatility also present opportunities. Stay informed, stay agile, and most importantly, stay hopeful. The market is constantly moving, and with it, opportunities will arise.
