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Market Recap
May 13, 2024
Higher rates are doing what they’re supposed to do.
Last week, Federal Reserve officials spoke about keeping the federal funds rate higher until it becomes clear that inflation will reach the Fed’s two percent target rate.
While people typically don’t mind earning more interest on their saving and investment accounts, higher rates are painful for consumers. That pain is why higher rates help lower inflation. They discourage borrowing and cause people to buy fewer goods. Lower demand for goods and services should lead to lower inflation, reported Trina Paul of CNBC.
So far, the biggest fly in the inflation-reduction ointment is housing. Diccon Hyatt of Investopedia explained:
“In the first two decades of the 21st century, the U.S. built 5.5 million fewer homes than were needed, the National Association of Realtors estimated in a 2021 report…The effects of that housing shortage are rippling through the economy, most obviously in the form of soaring home prices…official inflation rates, which are designed to measure the cost of living, are highly sensitive to any changes in housing costs. Housing costs make up 45% of the Consumer Price Index (CPI), the most widely watched measure of inflation.”
May data show consumers are feeling discouraged.
The University of Michigan’s Index of Consumer Sentiment dropped 13 percent from April to May. “[The] decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups…They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead,” stated Surveys of Consumers Director Joanne Hsu.
While consumer sentiment dragged on markets, first quarter corporate earnings reports were stronger than expected, which lifted U.S. stocks. “With well over 80% of the S&P 500 having reported results, companies are on track to have increased earnings by 7.8%, well ahead of the April expectation of 5.1% growth,” reported a source cited by Lewis Krauskopf of Reuters.
Declining sentiment caused U.S. stocks to stumble on Friday; however, major indices finished the week higher. Yields on many maturities of U.S. Treasuries moved higher over the week.
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Sources:
https://www.cnbc.com/select/how-do-increasing-interest-rates-affect-inflation/
https://www.barrons.com/market-data
https://www.reuters.com/legal/legalindustry/us-data-privacy-laws-enter-new-era-2023-2023-01-12/
https://foundation.mozilla.org/en/docs/design/branding/sub-brands/privacy-not-included/
https://pro.bloomberglaw.com/insights/privacy/state-privacy-legislation-tracker/#
https://www.washingtonpost.com/technology/2024/04/07/congress-privacy-deal-cantwell-rodgers/?_pml=1