Interest rates climbed to their highest level since November this past week amid ongoing concerns about inflation. Let’s delve into what unfolded and explore the significant news for the week ahead.

Dwindling Confidence

Federal Reserve Chairman Jerome Powell addressed the issue on Tuesday:

“At the FOMC, we’ve stated that we require greater confidence in inflation moving sustainably toward 2% before considering easing policy. Recent data haven’t bolstered that confidence; instead, they suggest it may take longer than anticipated to reach that goal. Currently, given the robustness of the labor market and the progress on inflation so far, it’s appropriate to give restrictive policy more time to work and let data and the evolving outlook guide us. If higher inflation persists, we can maintain the current interest rates for as long as necessary.”

In essence, Powell indicates that recent inflation figures remain high, with unclear progress toward the Fed’s target, and they intend to keep rates elevated for an extended period.

This stance prompted a negative reaction in the bond market, with the 10-year Note spiking to 4.70%, the highest level of 2024. There’s growing skepticism in the financial markets regarding the Fed’s ability to bring inflation back down to 2% without risking a recession due to prolonged higher rates.

“Sell in May and Go Away” Coming Early?

Stocks reacted unfavorably to the surge in interest rates, experiencing a sharp selloff, pushing indices to their lowest levels since February. There’s a common adage in financial markets, “Sell in May and go Away,” suggesting investors sell stocks during May to avoid the summer months, then repurchase in the fall. The spike in rates and increasing uncertainty might have prompted investors to kick off this phenomenon a few weeks early.

Coping with Higher Rates

When interest rates spike, higher yields eventually attract investors, tempering the rate increases. This was evident as the 10-year Note reached 4.70% on Tuesday before easing to 4.57% by Thursday.

On Wednesday, in another indication that higher rates draw buyers, the Treasury Department successfully auctioned billions of dollars in 20-year bonds, with strong demand from investors.

Decline in Oil Prices

High oil prices contribute to inflation and are unfavorable for bonds. Oil, which recently hit $90 a barrel, declined to $82 on Thursday. Lower oil prices were welcomed by the bond market and provided some relief from the 2024 highs in rates.

Housing Impact

Housing Starts and Building Permits for March fell well below expectations. With the market in need of housing inventory, this weak signal is unwelcome as we enter the spring housing market. With rates still elevated in April, home builders may also express doubts that rates will come down.

 

With inflation concerns high and the Fed stepping back from a potential June rate cut, it’s challenging to foresee any near-term relief in interest rates. Monitoring incoming data for signs of cooling inflation will be crucial.