The Independent Market Observer

What Mattered This Week? Interest Rates Jump

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Oct 20, 2023 3:55:00 PM

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building blocks symbolizing rising interest ratesWhen I look at what mattered each week, there are often multiple candidates. What usually gets the nod for more discussion is what changed that week. That is certainly the case this week. Lots of things mattered, including the war in Israel, and I don’t want to minimize that ongoing tragedy. But what changed this week—and what mattered most in economic terms—was the sudden jump in interest rates.

Rates on the Rise

The 10-year U.S. Treasury note yield, for example, rose from below 4.7 percent (already high by recent history) to almost 5 percent last week, before pulling back a bit. That is up from 4.4 percent 30 days ago and 3.75 percent 90 days ago. These are huge jumps over a short time period, and they will certainly have an effect across the economy. The last time rates were this high was in early 2007, before the financial crisis.

We can already see the effects in the financial markets. Mortgage rates are approaching 8 percent for a 30-year fixed loan. We can see the effects in stock valuations, with U.S. markets down by 2 percent to 3 percent this week as they adjust to higher rates. The financial impact has been real and immediate.

Real Economy Continues to Grow

Where we don’t see an impact (yet, at least) is in the real economy. Job growth came in last month at almost twice expectations. Consumer confidence and business confidence are holding. And the retail sales report this week came in much stronger than expected. While the financial impact is real, the real economy continues to grow.

So, why the difference? Markets are catching up with what the Fed has been saying for months now: rates will be higher for longer. That is and will be a painful financial adjustment. But for the real economy, the strong labor market is acting as a cushion. For the average person, although the impact of interest rates is real, available jobs and real wage growth are helping everyone through it.

Not So Bad?

In other words, there has been a lot of turbulence in interest rates, but growth continues. As I have been saying regularly, while there are real concerns here, things are still not bad at all. And that’s a good way to start the weekend.

Have a great one!

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