Markets are now pricing roughly a 68% to 70% chance that the Federal Reserve will raise rates in September, after hawkish signals and oil-driven inflation worries pushed Treasury yields toward multi-year highs.
The shift has been rapid. A week ago, Fed funds futures implied closer to a 40% probability of a hike. The move higher reflects renewed concern that energy costs and services inflation will keep headline inflation above the central bank's target for longer than expected.
For housing, the implications are immediate. The 30-year mortgage rate is climbing toward 6.8% or higher, reinforcing the lock-in effect that has frozen existing-home sales and kept inventory tight. Affordability is worsening just as seasonal demand usually picks up.
Technology and growth stocks are also under pressure. Higher discount rates reduce the present value of future earnings, and the sector's recent leadership in the rally makes it vulnerable to sharp rotations. Some investors are rotating into cash-like instruments and shorter-duration bonds instead.
The key event ahead is the September Fed meeting. If the statement and dot plot reinforce the higher-for-longer message, mortgage rates and long-duration valuations could come under further pressure. If the Fed instead signals caution, markets may breathe a sigh of relief.
Image source: i.ibb.co