Good Tuesday AM,
Most asset classes are having a good day. Equities are up broadly 2.5%+, crypto the same, and bonds are gaining as well. Mortgage bonds are +37bos and the 10 Treasury is at 3.61%. I suspect we could see a 3.5 handle soon. From there we could make our way back to 3.26. I don’t want to get ahead of myself but I’m a glass half full guy (mostly).
Some of the news came early on when The Reserve Bank of Australia sparked speculation that central banks may be on the threshold of tapering their hiking cycles, raising rates by a quarter point instead of the expected half-point move. Governor Phillip Lowe noted that the cash rate has been “raised substantially in a short period of time.”
Then a United Nations agency said the Federal Reserve and other central banks risk pushing the global economy into recession followed by prolonged stagnation if they keep raising interest rates,. The warning comes amid growing unease about the haste with which the Fed and its counterparts are raising borrowing costs to contain surging inflation. In its annual report on the global economic outlook, the United Nations Conference on Trade and Development estimated that a percentage point rise in the Fed’s key interest rate lowers economic output in other rich countries by 0.5%, and economic output in poor countries by 0.8% over the subsequent three years. UNCTAD estimated that the Fed’s rate increases so far this year would reduce poor countries’ economic output by $360 billion over three years, and further policy tightening would do additional harm.
Some cracks in the economy are becoming visible.
This AM, we had two important data sets which are also fueling the mini-rally as they came in WEAK. Keep in mind that weaker data, for the moment, makes Wall Street consider the Fed may not hike as quickly or as much.
- JOLTS 10.053M vs 10.45M
- Factory Orders 0.0 vs 0.3
The jobs numbers are affected by a slowing economy, and while they have been resistant to the Fed’s hikes so far, I continue to believe that the full effect of those hikes has not been felt yet. Growth in the U.S. manufacturing sector eased in September to its slowest pace in more than two years, continuing a downward trend as slowing demand for goods weakens factory activity. The Institute for Supply Management said its U.S. manufacturing index fell to 50.9 in September from 52.8 in August, the lowest level since May 2020, when the economy was at a standstill as the first wave of Covid-19 hit. Readings above 50 signal expansion in activity, below 50 contraction. In one sign of fading demand, measures for new orders, exports and employment all slipped into contraction.
The consumer knows best. That is a truism. The consumer knows how much they can and should spend in real time, not looking in the rear view mirror as economists do. The below chart just adds credence and confirmation to the ISM and Factory Order data.
And last, I wanted to share a chart from the smart guys on Wall street, on a national level, they see home prices deflating maybe 5%. Most of that will be California and up the west coast. When rates drop, velocity will pick up and prices will start increasing.
I still see this as an opportunity to buy the dip.
Please remain safe and stay healthy, make today great!