Interest-rate-sensitive sectors, specifically housing, experiencing pull back. Over the last year home sales have plunged over 30% and the housing sector is likely to remain under pressure in the coming months. The Federal Housing Finance Agency released the U.S. House Price Index for March 2023, indicating a 0.2% increase in January 2023 from December 2022. It is important to recognize that housing affordability remains near a 20-year low, and while the current correction is not a repeat of 2008, the biggest concern for housing going forward is a lack of housing mobility and an elevated barrier to entry.

Significant cooling of consumer spending in the first quarter of 2021. While a spending jolt in early January gave the impression of an extremely resilient consumer, elevated prices, high interest rates and deteriorating credit conditions have slowed down spending. Personal income remains well below the pre-Covid trend, and while consumers may have been able to manage the burden of elevated prices thanks to savings and credit, these buffers cannot replace organic income growth. The future of consumer spending can be predicted reasonably well with credit card debt hitting record highs in April, with many Americans holding more in debt than savings.

Market pricing in final 25 bps interest rate hike in May. The bank failures fiasco in March has quickly boiled over in investors’ minds; investors are pricing a terminal fed funds rate range of 5% to 5.25%, in line with the Federal Open Market Committee (FOMC) statement that “some additional policy firming may be appropriate.” However, while Wall Street and FOMC are finally in line, market futures also seem to be indicating a short and shallow recession some point in the summer. Additionally, a rate cut looks less likely as inflation is still running well over twice the Fed’s 2% target and a strong labor market persists. It is important for consumers to realize that many of the previous rate hikes have not yet filtered into the economy. As rates filter with greater speed into slower private sector activity, rate cuts could be possible before the end of the year.

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