Rates & Mortgages Update – April 2024

Notwithstanding significant pushback from the Transitory Inflation pundits, the market finally gave up on the notion of significant interest rate cuts this year. Yesterday’s CPI print of 0.4% was only a tenth above consensus, but the year-over-year (YOY) Core CPI (ex food and energy) of 3.8% bludgeoned most hopes of even a DOTs projected three cuts, let alone the six to seven priced into the market at the start of the year.  While it is certainly true that many of the CPI components are lagging indicators, a headline print of 3.5% YOY is simply too large a lift for a “data-driven” FED to push back.

Of greater import is the ticking calendar.  The three summer FED meetings occur within weeks of the Democratic and Republican national political conventions, and thus a FED that hopes to maintain a fig leaf of independence would prefer to avoid rate moves that might signal a favor for either side.

Since it seems unlikely that the FED will hike rates this year, and more than one rate cut would require some solidly terrific inflation data, it is likely the market has found a new rate level and may stay here for the summer.  A UST two-year rate near 5.0% may well be pinned either way and is a rather fancy return for a zero-risk asset.  Thus, it is possible it could draw money out of a fully priced Equity market with a CAPE near 28.

With the data pinning the FED to the mat, it seems likely that the volatile politics of November may take center stage a bit earlier than expected, although we have no idea which side is bullish or bearish.