Baker Market Update – wk210625

It’s now been a week since the FOMC released their updated “Dot Plot” showing voting members expect two 25bp rate hikes by the end of 2023 and the bond market remains unfazed. The 10-year Treasury yield is down about 10bp since the June 16 meeting and is now down a full 25bp since the March 31 high of 1.74%. Partly credited with driving yields lower, is the plunge in 5-year inflation expectations priced into the TIPS market which are down 37bp from 2.55% in May to just 2.18% now. The market apparently believes the Fed may be right in its bet that the recent inflation spike is “transitory” and will dissipate as many of the reopening driven supply/demand imbalances fix themselves. To emphasize this point further, multiple Fed officials were on the speaking circuit this week touting their expectation that inflation will return to 2% by next year.

This week’s economic reports highlighted just how much record high home prices are impacting the housing market. Both new and existing home sales fell again in May as house prices hit yet another record high. Existing home sales are now down 14% since the recent peak in October as the median price surged by a record 24% to a record high $350,000. New home sales fared worse, down 22% since January as the median price of a new home surged 18% to a record high $374,000. The housing market has been red hot during the recovery, as pandemic weary buyers flush with stimulus and more able to work remotely have sought more room and better living conditions. But the recent drop in sales suggests there may be a limit to just how much buyers are willing to pay for that extra room and any additional rise in mortgage rates could spell further trouble for housing in the critical summer buying season.

Also reported this week, personal income fell by another 2% in May in the absence of additional stimulus and that impacted spending which was flat in May versus expectations for a 0.4% increase. The chart below highlights just how significant the 3 rounds of stimulus checks were to boosting incomes in April 2020, January 2021 and March 2021 as noted by the sharp spikes during those months. While it’s not surprising that incomes will spike if the government mails a free check to millions of consumers, what is a little more surprising is just how little spending increased during those months and how weak spending was when those checks were not there. After all the trillions of dollars of stimulus pumped into the economy, it is a little discomforting that consumer spending which is 70% of GDP is only now back to the long-term trend it was on prior to the pandemic.

Personal Income vs. Personal Spending: 2007 – Today

Source: Bloomberg

Turning to the week ahead, all eyes will be on Friday’s employment report to see if the economy can break the two-month streak of weaker than expected job gains. During the last two months, economists had expected the economy to add 1,675,000 jobs, but it added just 837,000 or 50% fewer than expected. Current expectations are for an increase of 700,000 jobs in June and a continued decline in the Unemployment Rate to 5.6%.

The Baker Group is one of the nation’s largest independently owned securities firms specializing in investment portfolio management for community financial institutions.

Since 1979, we’ve helped our clients improve decision-making, manage interest rate risk, and maximize investment portfolio performance. Our proven approach of total resource integration utilizes software and products developed by Baker’s Software Solutions* combined with the firm’s investment experience and advice.

*The Baker Group LP is the sole authorized distributor for the products and services developed and provided by The Baker Group Software Solutions, Inc.

For More Information
The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

INTENDED FOR USE BY INSTITUTIONAL INVESTORS ONLY. Any data provided herein is for informational purposes only and is intended solely for the private use of the reader. Although information contained herein is believed to be from reliable sources, The Baker Group LP does not guarantee its completeness or accuracy. Opinions constitute our judgment and are subject to change without notice. The instruments and strategies discussed here may fluctuate in price or value and may not be suitable for all investors; any doubt should be discussed with a Baker representative. Past performance is not indicative of future results. Changes in rates may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.