Inflation remains front and center

Inflation and geopolitical uncertainty kept yields relatively elevated last week, with the 10-year Treasury climbing to nearly 4.7% by midweek. The effects are showing up across markets as evidenced by the 30-year mortgage rate rising to 6.5%. That is its highest in nine months, which could potentially pour cold water on the housing market as we enter peak season. At the short end of the yield curve, markets are still pricing in expectations for the Federal Reserve to hike rates later this year — a significant shift after entering the year with two cuts in the forecast. 

The latest minutes from April’s Federal Open Market Committee meeting reinforced the policymakers’ growing unease with the inflation side of its dual mandate. The minutes noted the “vast majority” of participants saw greater risk that inflation would take longer to return to 2% than they had previously expected and “a majority” of participants felt policy actions could be appropriate if inflation were to run persistently above target.  

Consumers appear to share this unease. The latest University of Michigan consumer sentiment reading fell to a new record low. That caution also came through in quarterly earnings calls last week, in which major US retailers described a bifurcated consumer becoming more selective in certain areas of spending.