Enjoy Your Memorial Day

Before we begin the unofficial start to summer that is the long Memorial Day weekend, let’s examine the economic news from this week. 

It was a volatile week for rate markets and we saw yields/rates hit the highs from February.  Thankfully, they pulled back from those levels. 

Last Friday saw the long anticipated and not surprising downgrade of the US credit by Moody’s. This followed downgrades by the other major rating agencies over the past couple years. This downgrade of US credit is due to the huge increase in deficit spending (spending greater than revenue coming in) and the ballooning national debt. 

The payment of the interest is well over $1 Trillion annually, an unsustainable amount. Interest rates opened higher but bounced back over the course of the day. This is the same thing that happened with the prior downgrades. 

Consumer Sentiment: Second-Lowest Ever Reading

The University of Michigan reported that Consumer Sentiment fell to 50.8% in May. That is the second lowest reading ever in their tracking since 1952. 

Consumers expect inflation to rise to 7.3% over the next year, the highest since 1981. Over 60% of respondents are expecting more unemployment over the next year, the most since the 2008 financial crisis. This survey was conducted prior to the positive trade developments in China and the UK. 

Bond Auction: Weak Demand Pushes Rates Higher

Wednesday had a very poor 20-year bond auction that caused rates to hit the highs of the week. That was coupled with global yields increasing in Japan and the UK. Federal Reserve (Fed) members gave several speeches this week that continued to state their position on holding to see what happens with the trade disputes. 

Existing Home Sales: Spring Market Still Slow

Existing Home Sales fell 0.5% in April, which is worse than was expected.  YoY sales are down 2%. Sales are well below what is normal for the spring market. This indicates pent up demand. 

If rates were to drop even slightly, this would release some of this demand and lead to more sales. The report showed that there is a 4.4-month supply of homes, which is higher than March’s 4.0 number. Market equilibrium is estimated to be 4.6 months. Homes remained on the market for 29 days, down from 36 days in March. 

New Home Sales: Best Pace Since February 2022

New Home Sales had a great report with signed contracts on new homes rising 10.9%, much stronger than expected. This is the highest pace of new home sales since February of 2022. The median home price was reported at $407,000.

Tax Bill: Spending Fears Push Rates Up

The big news event of the week was the passage by the House of the “One, Big Beautiful Bill,” which is the new tax and spending bill. It is causing bond markets to be afraid of an increase in spending and debt levels. This is pushing rates higher. It still has an uncertain future in the US Senate. We will wait and see.

Looking Ahead

The markets closed at 2pm Friday for the holiday.  They will remain closed until Tuesday. 

Tuesday, May 27:

• FHFA House Prince Index
• Case-Shriller Home Price Index

Thursday, May 29:

• GDP – Second Estimate
• Initial and Continuing Jobless Claims
• Pending Home Sales

Friday, May 30:

• Personal Consumption Expenditures (PCE, Fed’s favorite inflation measure)
• Chicago PMI