There have been 2 major economic themes so far this year. The first is the rise in inflation and hence the cost of living and the second has been the rise and indeed rise of the US Dollar. These are linked in so many ways as for us in the rest of the world commodities are priced in US Dollars meaning it was making them even more expensive. But if we look at the United States itself we see that it is the interest-rate increases combined with the promises of more of them, that has driven the US Dollar higher. So the cure for the US creates more trouble for the rest of us and that is before I get to the issue that the sensible for other central banks is simply to match the Federal Reserve. So we get higher interest-rates and bond yields too.
On Friday though we got the first hint that there may be what the Scorpions called the “Winds of Change” as I note this.
Federal Reserve officials are barreling toward another interest-rate rise of 0.75 percentage point at their meeting Nov. 1-2 and are likely to debate then whether and how to signal plans to approve a smaller increase in December.
That was from Nick Timiraos in the Wall Street Journal and for newer readers he is the journalist who the Federal Reserve speak to when they want a story placed in the media. So at a time of many “sauces” he has been a bona fide one.
Until now the hammer has been down and it was expected to continue and the Fed has encouraged this.
The Fed has raised its benchmark federal-funds rate by 0.75 point at each of its past three meetings, most recently in September, bringing the rate to a range between 3% and 3.25%. Officials are raising rates at the most aggressive pace since the early 1980s. Until June, they hadn’t raised rates by 0.75 point since 1994.
I would take care with the comparisons over time as they have not be raising interest-rates that much at all! But they were trying to convince us that they had set a pace like a long-distance runner and would stick to it.
Cleveland Fed President Loretta Mester has signaled she would favor rate rises of 0.75 point at each of the Fed’s next two meetings because there hasn’t been progress on inflation. “We can’t let wishful thinking drive our policy decisions,” she said on Oct. 6.
That was a world which had seen the US ten-year yield rise to a new peak of 4.34% on Friday. Whereas now we are being told this.
If officials are entertaining a half-point rate rise in December, they would want to prepare investors for that decision in the weeks after their Nov. 1-2 meeting without prompting another sustained rally.
This is a much bigger issue that merely 0.25% less than expected because investors would start to project fewer rises and maybe even cuts next year. Actually it seemed some already were on Friday.
The S&P 500 closed up 2.4% on Friday, with all 11 sectors posting gains.
US Mortgage Rates
If we look for a trigger for the apparent change of view at the Fed it seems likely to be this.
Currently P&I is up about 59% year-over-year for a fixed amount (this doesn’t take into account the change in house prices). This is above the previous record increase of 50% in 1980. This assumed a fixed loan amount – if we add in the year-over-year increase in house prices, payments would be up over 70% YoY for the same house. ( Calculated Risk)
So mortgage payments are soaring and the US Federal Reserve must be so grateful that mortgage costs are not in the US inflation measures. After all why would you put in a number owner-occupiers do pay when you can put in one they do not? Using imputed rents has reduced the recorded inflation numbers.
A problem arises though when you return to the real world as new buyers and those remortgaging are both unlucky and facing quite a squeeze However desperately the Fed tries it will never find anyone lucky enough to pay one of its Imputed Rents. Oh and just to add they are something of a fantasy for those who do pay rent as well as I looked at on the 14th of October.
This implies, however, that we should expect the CPI in rents to converge in levels to the other price indexes. This is extremely worrying. While growth is converging (shown above), the market indexes remain around 14% higher than the CPI for rents.
So it is quite possible that both renters and home owners have told the Fed that the real world is a lot tougher than its models with their fantasy numbers.
The Economy
As it stands it looks okay.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 2.9 percent on October 19, up from 2.8 percent on October 14. After recent releases from the Federal Reserve Board of Governors and the US Census Bureau, the nowcast of third-quarter real gross private domestic investment growth increased from -3.6 percent to -3.3 percent.
So 0.7% in our terms although we do need to recall for perspective that the US economy shrank in the first two quarters of this year. Also we need to look ahead to late next year and 2024 to allow for leads and lags in the response to monetary policy. Although some do not seem to realise this.
Welcome to Hikelandia, where inflation just won’t budge ( The Economist)
Bank of Japan
I think that it caught the mood music and that is why it intervened on Friday and why it did so earlier this morning. Maybe they were too early in the cycle as the Yen has again strengthened ( 149.4 as I type this). But I think they are hoping for a change in interest-rate policy and may even have got something of a nod.
FX Swaps
These have reappeared.
Huw Roberts, head of analytics at Quant Insight in London, reckons the problems at Credit Suisse CSGN.S are behind the surge in Swiss demand for dollars. He notes that the SNB last week drew $6.3 billion from the U.S. Fed’s currency swap line facility, roughly double the amount drawn a week earlier. ( Reuters)
There is an arbitrage trade on here.
This year there’s an added twist: the Swiss franc basis has blown out to levels not seen for years.
In itself this is simply an arbitrage trade but it does pose a few questions. Essentially we are left with the Carly Simon critique.
Why does your love hurt so much?Why?Why does your love hurt so much?Don’t know why
Comment
We seem to be approaching the point where the US Federal Reserve looks ahead and does not like what it sees. We have learned over time that central banks prioritise the housing market and there we are seeing quite a squeeze being applied. So I would expect that to be the source of any change of strategy.
We can now also add in things that the Fed did not know when it was leaking this. Some of the moves in China over the weekend were too political for me but we can note this.
Hong Kong closing to drop about -7%. Question, when was the last time it dropped this much since 2010? Well, only today. Only today. We gotta go back to the GFC (2008) to get those huge intraday drops. ( @Trinhonomics)
Also it would appear that the foreign exchange intervention by Japan is struggling.
JAPAN ECONOMY MINISTER YAMAGIWA: I HAVE HANDED IN RESIGNATION. ( @financialjuice)
I counsel not over emphasising these issues as the Fed sets policy for the US and ignores the rest of the world. But they do have potential implications for the US.
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Shaun,
“We seem to be approaching the point where the US Federal Reserve looks ahead and does not like what it sees. We have learned over time that central banks prioritise the housing market and there we are seeing quite a squeeze being applied. So I would expect that to be the source of any change of strategy.”
The US likes a strong $ and the hikes in US good for the $ but not the US stock markets which has taken a pounding the last year.
The US stock market had small bounce on Friday with a hope the hikes would be reduced.
But as for the housing market the rise in interest rates has slowed buying and it is ready for a fall and that is what may change the US stance.
Here in the UK the £ has been weak and interest rates are going up which will also affect the housing market and if I was to have a gamble I would say nothing will affect a fall now albeit it will depend on various areas of the country.
The new PM in the UK won’t make a lot of differnce to how the economy performs we have a good idea now as to what will happen, there will be tax rises to come and austerity. The UK is heading for recession some think the UK is already in recession, Springboard footfall showed all destinations down last week.
UK PMI’s don’t make good reading:
https://uk.investing.com/news/economy/uk-economic-downturn-deepens-in-october-2792688
UK retail footfall drops 2.3% amid ‘consumer nervousness’
Economic Indicators 57 minutes ago (Oct 24, 2022 11:11)
UK retail footfall drops 2.3% amid ‘consumer nervousness’UK retail footfall drops 2.3% amid ‘consumer nervousness’
According to retail experts Springboard, footfall dropped in all key destination types – down 3.3% in high streets, 1.5% in retail parks, and 0.7% in shopping centres – and declined across all UK geographies – apart from Scotland where it rose by 1.1%
In six areas of the UK, the drop in footfall from the week before exceeded the average of 2.3%, dropping 3.7% in the West Midlands and 3.2% in the East Midlands. In high streets in the Midlands, the decline in footfall was even more severe – down 5.9% in the West Midlands and 5.2% in the East.
The uplift from 2021 across all UK retail destinations contracted to 5.9% from 6.7% in the previous week but the gap from 2019 widened to 11.1% from 9.2% in the week before last.
Diane Wehrle, Springboard’s insights director, said: “There are several factors at play in terms of what is driving consumer activity; however, the most evident is the squeeze on household incomes as a consequence of inflation and increased mortgage rates. This, mixed in with the current political uncertainty, inevitably makes consumers cautious and then rail back on shopping trips.
“This is likely to have been compounded by the prospect of school half term this week, which may well have meant that shoppers deferred trips last week. Footfall typically rises in the week of school half term as families visit retail destinations for group shopping trips and days out, so footfall this week will be a good barometer of current consumer sentiment and behaviour.”
I guess people are seeing their energy bill and the fact only £130bn gives support for 4 months …uh oh
( then food bill !! )
going to be a tough Christmas this year for many
Forbin
I shall say it is going to be tough “Kantar said 37% of UK consumers are struggling with their financial situation, while 47% are worried about Christmas.”
https://uk.investing.com/news/economic-indicators/half-of-britons-to-spend-less-this-christmas–kantar-2792747
There will be less cards sent as postage gone up significantly and less spent on presents in fact many families will ditch presents for friends.
Lets face it we are in a global downturn which could get worse than the 2008 financial crisis. Mervin King said recently that it was a mistake to do all the money printing during covid which has increased inflation.
He blamed the central banks and if they have now learnt their lessons and decide to curb this in future we could see years of stagnation and an even deeper recession. It is a possibility there could be a massive global downturn, and depression. What could also folow is a global house price fall.
However the above would be a worse case scenario and although the central banks wont want to do any more money printing leopards don’t change theiir spots and if they see assets set to fall significantly they may be forced to set the printing presses up again.
“..and if they have now learnt their lessons …”
well that’s a No then , nothing has changed since the last two crisis
Forbin
” Mervin King said recently that it was a mistake to do all the money printing during covid which has increased inflation.”
_______________________________________
No. Lockdown was the mistake; printy-printy was necessitated by lockdown.
Where would the banks & economy have been without furlough payments?
This M.K.?
M. King said in his {neoclassical} opening remarks: {Thursday 11 September 2008} :
“In the UK we face a difficult but, temporary, period during which inflation will remain high for a while and output growth at best weak. . . . But provided we do not impede the required adjustment we will come through this temporary period and resume a path of normal economic growth with inflation close to target. . . .
Provided we focus on bringing inflation back to target, our present difficulties will prove to be temporary. Inflation will fall back, and growth will resume.”
https://publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/1033/8091102.htm
Considering one of the Fed’s mandates is “stability”, it would appear to be failing in a catastrophic way.
Its interventions into the markets are becoming by necessity, larger and larger, more extreme and more frequent, resulting in massive busts followed by the now predictable inflation of the next asset bubble. If it were a lorry, bus or train driver, carrying out emergency stops followed by excessively dangerous speeds it would have been fired on day one, but of course as we all know, the Fed doesn’t answer to anyone and no one can stop them doing literally anything (see video below) and no one will ever challenge their authority or right to destroy the US and eventually the world’s economies let alone shut them down, which is clearly what is required to restore stability.
And yet most people have absolutely no idea what the Fed does or is supposed to do, and even thinks because of its name (the Federal part) it is a part of the government. This was done intentionally as a cover by the bankers who set it up as a private bank in 1913.
With regard to the housing market in the US, it may be hard to imagine but their bubble in many cities is larger than ours, with poor quality houses in dangerous (read gang infested) neighbourhoods of Los Angeles valued in excess of $1million.
Contrast that with prices post the GFC, I remember seeing properties in the dystopian nightmare of downtown Detroit (admittedly what would be considered derelict crack dens) on sale for $1. The life expectancy of the prospective buyer was never followed up, but I use the example as a means of contrasting the extremes that have been produced as a result of Fed policies
We’ve all heard of South Central Los Angeles, well here’s a prime example:
https://www.homes.com/property/1858-w-78th-pl-los-angeles-ca/339gwrg5tylvv/
Keep in mind that Los Angeles is very very big. The very definition of urban sprawl.
South Central is a big area and not all of it is like what the rapper Ice T described and where Rodney King was attacked. I remember someone like Michael Moore doing a TV show where he visited the very street that Rodney King was beaten up and the whole area was very pleasant. Generally an area where people buy and don’t rent is going to be less rough and the US social housing, “the Projects”, is less common in L.A. I believe the area has few restricting covenants and may not even have rent control. US housing rules vary dramatically from municipality to municipality.
What you are looking at is a detached house in area of the country with many jobs and great weather. 1 million USD is a lot but probably comparable with London. I know people who had the chance to buy in Clapham Common years ago but didn’t because it was so rough. Areas can gentrify.
This is the dangerous thing about Los Angeles, even the most dangerous areas look very pretty compared to our worst areas that look absolutely awful and serve as a warning to anyone venturing into them, with endless sunshine, established plants, flowers and palm trees, but is in fact populated by the most dangerous gangs imaginable, it may look fine in a photograph or even just driving through it, but get out of your car and start walking around and you will soon be confronted by some of the “homies” who will decide what happens next…………….
Stability ?
Europe PMI’s fell earlier following UK falls and the US PMIs have all fallen well short of forecasts which point to a slowing global economy.
‘If “full employment” is anything under 5% unemployment and “price stability” is core inflation below the Fed’s 2% target rate then the Fed has achieved its dual mandate a whopping 3.5% of the time since 1957 when core inflation was first tracked. Yes, you read that right. THREE POINT FIVE PERCENT OF THE TIME.* That means the Fed has failed to simultaneously achieve both its mandates 96.5% of the time. I wouldn’t call that failure. I’d say they’re not even trying. And maybe they’re not?’
https://www.pragcap.com/feds-dual-mandate-bull-sht/
For some enlightening thoughts here is what Jordan Peterson thinks about the green agenda and “Masters of the Universe” forcing this upon us:
There are far, far too many of us now, to be labelled conspiracy theory nutters.
Hi Shaun.
May I remind you that, in a previous discussion, you pointed out to me, that the reason that the Fed was not as hamstrung by mortgage rates as the BoE, in terms of raising interest rates, is because so many mortgages fixed for their whole term, so, obviously, payments won’t vary for mortgagees. It was an excellent point, & one which I took on board.
Fewer distressed buyers would seem to signal less of housing market re-adjustment, if & when one does occur, & as the USA has such a huge, diverse economy, & after so long with interest rates at a level whereby zombie companies do not meet their rightful doom, & also US employment being so good, the begged question has to be, “Wouldn’t a fight against inflation, coupled with a normalisation of interest rates be less destructive, & more positive for US rather than here in the UK?”
Furthermore, if we continue on an inflationary trajectory, isn’t it nearly always the case that the bottom 5 deciles suffer far more than the top 5, & that, with the huge majority of inflation being in the “non-core” necessities, that this is even more likely to be the case?
Under such a scenario, given that lower-income families’ incomes are not going to keep pace, do we not, just as quickly, get to the point where mortgages become unaffordable anyway, just by the route of inflation, rather than interest-rates, because so much more of their income is diverted to other necessities?
Won’t we still have a huge number of distressed buyers?
I think we’ve covered a few ways they can keep houses from becoming affordable, extend mortgage terms, partial ownership, lifetime mortgages, government assistance in the form of lump sums payable back at lower rates (or never!).Already doing it with student loans, they are being written of now in the US by the government.
I’m sure there are lots of others but the government will always come up with something even we haven’t thought of.
The plan of the globalists is to get everyone impoverished to such an extent that they are dependent on the state, so the government taking an increasing role in house financing is just the first stage in the eventual goal of eliminating home ownership completely, this will be done gradually (stagflation destroying savings and earnings, negative wage growth, pensions failures and defaults until the impoverishment gets to such a level that most people will not qualify for a mortgage.
Forecast that the £ would rise against the $ with the announcment of the new PM being Rishi short lived it has now fallen below 1.13
LOL
The truth is most of these analysts haven’t got a clue the UK is in a mess and whoever took over has to try and sort it out and that will take more than a year, I am expecting at least 18 months of recession and if the global economy continues to weaken longer.
The only good news is nond yileds falling reducing the UK debt but one swallow isn’t a summer !
Hi Peter
It is hard to say much about currencies today when we have seen several determined efforts from the Bank of Japan to support the Yen. Although even such obvious moves were missed by the US Treasury Secretary.
“Yellen Says No Information on Japan Intervening on Yen Again” ( Bloomberg )
Then there was this from China.
“China’s offshore yuan weakens past 7.3 per US dollar for the first time, an all-time low since the unit started trading in 2010 ” ( Bloomberg)
I would say that was significant for a managed currency but we can hardly criticise them for that with Japan intervening as it has.
So I think we are on the sidelines…
Ramsden ssys stability returning to UK after Rishi voted to be leader as bond yields fall but the £ is hardly booming against the $ ?
https://uk.investing.com/news/economy/recovery-of-uk-gilts-shows-credibility-coming-back-boes-ramsden-2793369
stability ?
wait until the latest opinion polls are released .
see if we get what the people think – this is politics I know but many I work with are none too pleased with Rishi the Spiv ( as they call him ).
Forbin
GB news are already saying it has been a stitch up, but Rishi is a globalist and I am not sure he will be able to protect the red wall seats up north.
Great blog as usual, Shaun.
Steve Hanke, the Inflation Whisperer, is worried that the US Fed may now be overdoing monetary tightening, recommending that M2 growth be kept within a 5% to 6% range until inflation eventually gets back to 2%. If you look at seasonally adjusted M2 growth, the annual growth rate only slipped below 5% in August (4.1%) and as recently as April 2022 the growth rate was still 7.7%. However, if one looks at the annualized rolling one-quarter growth rates from March to August they are as follows: 7.2%, 3.9%, 1.4%, -0.6%, -0.3% and 0.1%. So if the Inflation Whisperer is right, there is a serious risk that the US Fed is tightening too much. I noticed that the CDHI Monetary Policy Council which on September 1 was calling for the Bank of Canada to raise the overnight rate to 3.25% on September 7 and then leave that rate unchanged for a full year, last week recommended that the Bank of Canada raise the overnight rate to 3.75% on Wednesday and again to 4.0% on April 12. It is obvious that one of the reasons for the change in view was the evidence that the US Fed would continue raising rates, and if the Bank of Canada kept interest rates unchanged, that might lead to an unacceptable depreciation in the Canadian dollar, with the inevitable inflationary repercussions.
For now the most recent estimates for M2 for both the US Fed and the Bank of Canada are for August 2022. However, the US estimates were updated to August on September 27, the Canadian estimates on October 21. So that is a considerable difference in timeliness, which the Bank of Canada should perhaps work on reducing. I don’t know how it compares with other G20 central banks.