Last Week in Review: 3 Things the Financial Markets are Saying
When stocks rise, rates typically decline. When inflation moves higher, rates typically increase. As the economy reopens, rates will rise.
Well, stocks rallied to all-time highs, inflation spiked, and the economy continues to reopen. However, rates improved to the best levels in a month.
There are three things the financial markets are saying this week that are important for interest rates, stocks, and the economy in general.
1. Higher Inflation May Be a Short-Term Phenomena
The March Consumer Price Index (CPI) came in at 2.6% year-over-year, the highest level since August 2018. All signs are pointing to even higher consumer inflation in the next three months. BUT the market is forward-looking. Bonds are already looking at where inflation is going to be four months from now. At the moment, the bond market is not worried about inflation, because if it was, rates would be higher.
2. The Fed Has Our Back
Despite a vocal slip midweek where Fed Chair Powell said they would taper bond purchases “well in advance” of hiking rates, stocks are basking in the glow of the notion the Fed is still “not even thinking about, thinking about” hiking rates or tapering its bond purchase program.
3. Economic Reopenings Are Stimulus
The economic reports this past week highlighted pent-up consumer demand and the positive impact of states reopening their economies. Retail Sales, a measure of consumer spending activity, rose a scorching 9.8% on a month-to-month basis. Moreover, Initial Jobless Claims, those seeking first-time unemployment benefits, fell to the lowest level since the early days of COVID.
Bottom line: The financial markets are saying inflation is not a problem yet, and the consumer is going to drive economic growth. And during it all, the Fed will keep rates low, helping the recovery further and putting upward pressure on stocks. This is an amazing moment to take advantage of the current interest rate environment, as the present improvement in rates could be short-lived.