Will the interest rates come down this year?

North American equity markets dipped last week as the earnings season continued with some major names posting disappointing first-quarter results. The markets, however, have advanced higher year to date on the optimism that the central bank not only stops their interest rate hike but start cutting rates by the yearend and there are supporting factors. S&P 500 and Nasdaq are up 7.35% and 14.59% and Canada’s S&P/TSX Composite has advanced 6.61% in 2023.

The US central bank is expected to increase interest rates by another 0.25% to 5% in their next meeting with the possibility of even further increases. They have shown determination to hold the rates at that level to see the inflation coming back to the 2% target. Although Canada and US inflation cooled down in the latest readings, thanks to lower energy prices and unchanged food prices, to 4.3% and 5% respectively, they are still sticky. Assuming the numbers remain around these levels for some time, the real rate of return, which is the difference between interest rate and inflation, is almost negative.

The swap rates which is a reference rate in the banking sector show the markets expect the central banks to cut rates by 0.5% in 2023. The bullish equity market trend and the reviving housing market in the US and Canada could be signs of such beliefs.

The existing home sales in the US for March was 4.4 million units which are lower than last month but the demand is relatively robust with 28% of the houses sold over the prices the asking price that the seller was looking to get