The good news for Americans? The global slowdown is helping to lower US Treasury yields which, in turn, helps to help to lower US mortgages rates. Kind of a perverse “good news” story when you think about it.
The bigger picture is the slowdown caused by 1) a global economic slowdown and 2) the tightening of Fed monetary policy to fight inflation.
Look at the Case-Shiller national home price growth YoY (blue line) against M2 Money growth YoY (green line). Just move the green line to the right and it covers home price growth. Both are slowing down with anticipated Fed rate hikes (red line) now at 50 basis points for the December 14th FOMC meeting. And note that The Fed’s balance sheet (orange line) has barely budged.
The Fed has signaled the terminal rate will likely be around 5% — we think an upper bound of 5% — reached in early 2023. To get there, the central bank will likely raise rates by 50 basis points at its December 2022 meeting, followed by two more 25-bp hikes in 2023. We then see it holding at 5% throughout the year. Markets have priced in a similar amount of tightening.
Controlling inflation comes at a cost to growth. Yield curves have inverted. A Bloomberg Economics model shows a 100% probability of recession starting by August 2023. Take that — like all model forecasts — with a grain of salt. But the basic view that aggressive Fed tightening will very likely tip the economy into a downturn is correct.
While various measures of impending US recession show a good chance of a 2023 recession, Powell’s preferred measure of the yield curve shows only a 30% chance.
What Might the Recession Look Like?
We project a 0.9% GDP contraction in 2H 2023, driven by an investment downturn as firms pare inventories amid a downshift in consumption. Residential investment will also contract with real interest rates likely to rise steadily throughout 2023 as nominal rates stay high and inflation moderates.
An Inventory-Led Downturn
Resilient consumption should help put a floor under demand.
Households have enough of a cash buffer — extra savings built up over the course of the pandemic, rising COLAs for Social Security recipients, ongoing state and local government stimulus and solid 2022 wage income growth — to sustain consumption during the recession. Our base case is for real spending to grow at a quarterly annualized pace of about 0.5% in 2023, with strength concentrated in services.
By one measure, households may still have $1.3 trillion in the coffers, based on flows within the personal income report through September. At the current rate of drawdown, that’s enough to last around 15 months, or through the end of 2023. Funds may dry up faster as job losses mount and the unemployed fall back on their savings.
$1.3 Trillion Extra Savings to Keep Spending Positive
The labor market remained exceptionally tight into the end of 2022. We expect it to soften significantly next year, with the unemployment rate rising to 4.5% by the end of 2023. The pace of hiring will slow markedly as support from catch-up hiring dissipates and the effects of restrictive monetary policy settle in. We estimate only 20%-30% of total employment is still in sectors experiencing labor shortages, implying demand for labor is falling fast.
Avoiding a Hard Landing Depends on Inflation, Fed
Extreme circumstances — the pandemic, Russia’s invasion of Ukraine — have made a recession more likely than not. Extreme circumstances can change, and so can policy makers’ response Whether the US can stick a soft landing depends substantially on how external conditions develop and how the Fed responds.
Not our base case, but we can envision a scenario in which the central bank opts to ease rates in 2023, boosting the chances of a soft landing.
One way that could happen is inflation falling faster than expected. Currently, our baseline is for headline CPI to drop to 3.5% and the core to 3.8% by the end of 2023. The most important assumption there is that energy prices remain flat next year from 2022.
In an alternative scenario, inflation fall faster as China maintains Covid controls and growth stumbles. A Bloomberg Economics model attributes the recent fall in oil prices entirely to a drop in demand — mainly from China. If China’s growth falls off the cliff, perhaps amid a sharp rise in Covid cases and resumed lockdowns, commodity prices could tumble sharply.
A warm winter in Europe and the US could also keep energy prices in check. Lower demand from Europe for US liquefied natural gas would help stem the increase in domestic electricity prices.
In that scenario, US energy prices could fall 20% in 2023 and headline inflation may drop to 2% by the end of the year. Lower gasoline prices would work to soften inflation expectations, easing pressure on the Fed to hold rates at higher level. A rate cut could then come in 2H 2023, raising the possibility of a soft landing.
Scenarios of CPI Inflation in 2023
The risk cuts both ways. A quick and successful pivot to reopening in China could boost oil and other commodities prices. A colder winter in Europe and the US would generate upward pressure for electricity and utility prices. Assuming China is fully open by mid-2023 — the base case for our China team — energy prices could increase by 20% in the year. In that case, headline US CPI would hit a bottom of 3.9% in midyear before surging to 5.7% by year-end.
In that scenario, the terminal fed funds rate would most likely top 5%, possibly closing 2023 near the upper end of St. Louis President James Bullard’s estimated restrictive range of 5%-7%.
Bloomberg Economics US Forecast Table
Thanks to Yellen’s legacy of too low interest rates for too long, The Fed is playing catch-up by finally raising rates.
US mortgage rates fell for a fourth week in a row, the longest such stretch of declines since May 2019.
The contract rate on a 30-year fixed mortgage eased 8 basis points to 6.41% in the week ended Dec. 2, still the lowest since mid-September, according to Mortgage Bankers Association data released Wednesday.
Rates have retreated for the past month as the Federal Reserve has signaled it will soon slow down the pace of interest-rate hikes, likely at next week’s policy meeting.
Even so, MBA’s mortgage purchase index fell 3%, the first drop in five weeks, underscoring how demand remains fickle and driving a decline in the overall measure of mortgage applications. On the other hand, refinancing activity rose last week, but remains near the lowest level in two decades.
Here is a chart of mortgage applications from the Mortgage Bankers Association showing the decline in US mortgage rates, and increases in mortgage purchases and refi applications. The Refinance Index increased 5 percent from the previous week and was 86 percent lower than the same week one year ago. The unadjusted Purchase Index increased 31 percent compared with the previous week and was 40 percent lower than the same week one year ago.
The MBA survey, which has been conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and thrifts. The data cover more than 75% of all retail residential mortgage applications in the US.
Always behind the curve, US Senators (Warren, Marshall, Kennedy) want to get to the bottom of Silvergate’s decline and its relationship with Sam Bankman-Fried and FTX. This reminds me of the 2008 financial crisis when The Federal Reserve claimed they never saw it coming. Despite the data.
But back to crypto bank Silvergate.
Crypto bank Silvergate Capital Corp. was asked by three US Senators to release all records about transfers of funds for the collapsed FTX empire of Sam Bankman-Fried.
“Your bank’s involvement in the transfer of FTX customer funds to Alameda reveals what appears to be an egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients,” Senators Elizabeth Warren, Roger Marshall and John Kennedy wrote in a letter released Tuesday. “The public is owed a full accounting of the financial activities that may have led to the loss of billions in customer assets, and any role that Silvergate may have played in these losses.”
Shares of the La Jolla, California-based bank fell as much as 8%. The slide extends Silvergate’s losses on the year to more than 84% and has it trading at a fresh 52-week low. Not surprisingly, Silvergates’ stock price is closely linked to cryptocurrency Bitcoin.
The letter cite concerns about the banking services that Silvergate provided to both FTX as well as Bankman-Fried’s trading firm, Alameda Research. It says the arrangement between FTX and Alameda depended on Silvergate’s depository services and puts the bank “at the center of the improper transmission of FTX customer funds.”
“Silvergate’s failure to take adequate notice of this scheme suggests that it may have failed to implement or maintain an effective anti-money laundering program, as required under the Bank Secrecy Act,” the Senators said.
Perhaps Silvergate should be renamed Silverfish. But seriously, no US Senator or DC regulator saw the following chart?? Bitcoin and other cryptos have been clobbered in 2022 as The Fed tightens monetary policy to combat inflation.
Here is our regulator, SEC’s Gary Genslar, keeping an eye on cryto exchanges like FTX.
Maybe US Senators and DC regulators thought Silvergate is a silverfish.
As The Federal Reserve tries to crush Bidenflation, we are seeing Fed Remittances to the US Treasury soaring (white line). At the same time, we see the Biden Administration draining the Strategic Petroleum Reserve (orange dashed line). And as The Fed tightens, M2 Money growth crashes (green line).
And with tech layoffs, I predict that 2023 job growth will be pretty bad.
As I have discussed before, I am a fan of ADP’s job reports and not a fan of the BLS NFP reports. As M2 Money growth slows, we can see declining ADP jobs added (yellow line), but BLS’s NFP report shows huge spikes.
Lastly, we have Sam Bankman-Fried and FTX. SBF should be in custody for being involved in one of the biggest fraud cases in history, but like Hunter Biden, is roaming free and trying to raise MORE funds. Why are these lapses in justice occuring with “10% for The Big Guy” Biden?
As The Federal Reserve continues its assault on inflation by raising their target rate, Blackstone Inc.’s $69 billion real estate fund for wealthy individuals said it will limit redemption requests, one of the most dramatic signs of a pullback at a top profit driver for the firm and a chilling indicator for the property industry.
Blackstone Real Estate Income Trust Inc. has been facing withdrawal requests exceeding its quarterly limit, a major test for the one of the private equity firm’s most ambitious efforts to reach individual investors. The news, in a letter Thursday, sent Blackstone stock falling as much as 10%, the biggest drop since March.
You can see the problem facing commercial real estate. Since December 31, 2021, NAREIT’s all-equity REIT index has fallen -23.6% while NAREIT’s mortgage REIT index has fallen -28.6%. It looks like Blackstone’s Real Estate Income Trust has a decline coming.
If I look at NCREIF’s commercial property index, we can see that The Fed helped boost CRE values. But what will happen if and when The Fed actually shrinks its balance sheet.
I call The Fed’s attempts at cooling inflation “Fed Dead Redemption” since it resulted in redemptions from real estate funds.
Unlike yesterday’s ADP jobs report (only 127k jobs added), the official Federal government report shows 263k jobs added. I like the ADP report, but The Fed pays attention to the BLS numbers. So, …
U.S. employers added 263,000 jobs in November, and the nation’s unemployment rate stayed the same at 3.7 percent, according to data released Friday by the Labor Department. Meanwhile, average hourly pay for workers rose 5.1 percent from a year earlier, to $32.82 from $31.23. But the US headline inflation rate at the last reading was 7.7% YoY that equates to -2.2% REAL Average Hourly Earnings YoY.
Mortgage rates fell to 6.51 yesterday, but expectations of Fed rate hikes (WIRP) and the 10-year Treasury yield are up today. In fact, the 10-year US Treasury yield is up 10 basis points this morning. This will likely translate to higher mortgage rate today.
Inflation is still the humming dragon crushhing the US middle class and at last report stood at 7.7% YoY. Average hourly earnings YoY rose to 5.1% in November, which is good. But inflation takes a huge bite out that number, resulting in -2.2% YoY REAL average hourly earnings.
And the US 10Y-2Y Treasury yield curve has been inverted for 109 straight days.
Here is the rest of the jobs report.
The biggest gainer? Motion picture and sound recording industries followed by logging (with rising energy prices, people have to heat their homes somehow).