Geopolitical tensions eased in the Middle East providing relief for oil prices which supported lower bond yields as inflation concerns abated. At the time of writing, West Texas Intermediate had fallen by around $9 per barrel on the week to $66, the 2-year Treasury yield was 0.15% lower at 3.75% and 10-year Treasury also 0.10% lower at 4.27%.
Economic data came in on the weaker side and Fed Chair Powell’s testimony to Congress leaned more dovish as he indicated that interest rates would be lower absent uncertainty surrounding tariffs.
The third revision of first quarter GDP came in below the prior revision, at -0.5% on an annualized basis compared to -0.2% previously. High imports ahead of tariffs remained the main drag on GDP, but of note the personal consumption expenditure component weakened from 1.2% to 0.5% in the latest revision. Consumer spending habits do indeed appear to be moderating as the labor market cools, prices and interest rates remain high and excess savings have been spent down.
The housing market remains depressed as evidenced by May’s existing home sales print of 4 million units on an annualized basis, down from a peak of around 6.5 million units during the pandemic, and still far below the average run rate of approximately 5.5 million units in the five years preceding it. High current mortgage rates and existing homeowners who locked in lower rates during 2020-21 and are unwilling to move is still the main issue. This lack of inventory has supported strong price appreciation in US homes over the past five years although we are starting to see prices cool and even decline in certain markets.
Perhaps the highlight of the week was the Personal Consumption Expenditure (PCE) price index for May, the Fed’s preferred inflation gauge. PCE rose 0.1% on a month-on-month basis, and 2.3% on an annual basis. Excluding food and energy, the core PCE price index rose 0.2% and 2.7%, slightly above expectations. With inflation moderation and tariff impacts so far not showing up in either producer or consumer prices, pressure is building on the Fed to lower rates. The Chandler team still expects the Fed to start reducing interest rates again this year, which should support front end bonds and cause the yield curve to steepen further.
Next week: S&P Global US Manufacturing PMI, ISM Manufacturing PMI, JOLTS Job Openings, ADP Employment Change, Trade Balance, Change in Non-Farm Payrolls, Unemployment Rate, Initial Jobless Claims, ISM Services, Durable Goods Orders
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