reports
- Joseph Lavorgna
- Troy Ludtka
Budgetary Payback
When the government stimulates the economy, it runs the risk of a growth hangover ( down-the-line ) unless there is a concurrent increase in aggregate supply or ever further stimulus measures are pursued. With the federal deficit set to be reduced considerably (to just -4.2% of GDP according to the CBO) , 2022 will be the year the pied piper is paid. A less accommodative stance from Washington is central to our below consensus view on growth and is yet another factor weigh ing on inflat...
- Joseph Lavorgna
- Troy Ludtka
The Boom-Bust Checklist Filling Up
National home prices have seen an historic runup . As of March (the most recent data), national home prices are up 20.6% YoY. Home price inflation of this magnitude is significantly higher than what was experienced during the housing bubble in the early - to - mid 2000s. We’ve seen the home price boom, is a bust in the offing?
- Joseph Lavorgna
Still Far From Normal
Net of revision, May jobs were modestly stronger than expected, rising 390k compared to 436k in the previous month. While the May figure was below the trailing 12-month moving and year-to-date averages, the Fed remains on track to lift interest rates 50 basis points on June 15. The state of the labor market will be key in determining how far the Fed goes in both raising interest rates and reducing its balance sheet.
- Joseph Lavorgna
- Troy Ludtka
Worker Demand at an Inflection Point?
The labor market has been red hot, with nearly two job openings for every unemployed worker . T he unemployment rate sits at just 3.6%, which is historically low. We may be reaching an inflection point , however. The jobs market is a lagging indicator meaning it reflects past growth , in this case from last year’s economic boom. S ince the beginning of the year , leading economic indicators show that growth is downshifting . This will cool the demand for workers.
- Joseph Lavorgna
Restrictive Policy Already Priced In
Even though the Fed has only raised interest rates a cumulative 75 basis points thus far, there is significant tightening already built into the forward curve. This means that monetary policy is poised to act as a break on economic activity well before the Fed reaches its expected peak in rates.
- Joseph Lavorgna
What Will it Take for The Fed to Pivot?
The futures market is predicting a 3.00% fed funds rate by March 2023. This is 200 basis points above the higher end of its current range. But this does not fully reflect the totality of the Fed’s expected actions because quantitative tightening (QT) begins i n mid-June. Based on our projections, the Fed is on track to shrink its balance sheet by $900 bn over the next nine months. Beyond a sharp and unexpected collapse in inflation, which is unlikely at present, what will it take for the ...
- Joseph Lavorgna
- Troy Ludtka
More Pain to Come?
This morning, real disposable personal income data w ere released. On an annualized basis for the first four months of 2022 , they were down 5.5% . This reading is 1.5 standard deviations below the historical mean for the series (dating back to 1959) and is consistent with an economy near recession ! Declining real incomes first detract from demand and then prices, in a lifecycle that takes about one year. The question key for the economic outlook is — w ith the economy sharply do...
- Joseph Lavorgna
- Troy Ludtka
What Constitutes a Recession? (Revisited)
The economy shrank 1. 5 % at an annualized pace in Q1, the first quarterly decline ( outside of the pandemic downturn ) since Q1 2014. Most investors mistakenly think that two consecutive down quarters constitutes a recession. While that is generally the case, data other than real GDP are more useful. In other words, we can enter recession this year even if the economy is still technically expanding.
- Joseph Lavorgna
- Troy Ludtka
A Panoply of Housing Weakness
Currently, most measure s of housing activity are deteriorating quickly, which is troubling because housing is a leading indicator of the broader economy. This situation is consistent with our long-term view that 2022 real GDP growth would be significantly below consensus expectations. The main issue going forward is whether the economy can skirt a recession this year.
- Joseph Lavorgna
- Troy Ludtka
Inflation’s Comedown
According to monthly surveys from major regional Federal Reserve bank s , growth is slowing, while prices are climb ing in both the manufacturing and the services sectors. This , c ombined with oil prices also march ing higher , has many notable investors worried about stagflation . However , existing economic dynamics suggest that inflation may come down faster than many expect. As a result, monetary policymakers must tread carefully.
- Joseph Lavorgna
- Troy Ludtka
Look at What They Say and Not as They Do
I t is important to look at what consumers are saying and not just a t what they are doing. C onsumer health is deteriorating at the same time that consumption is strong. Some might conflate current consumption with s olid consumer health and then think that economic risks are low . This is a mistake. P rice increases are forcing consumers to part with more money than they otherwise would , leading to a falling savings rate . This renders the US consumer highly susceptible...
- Joseph Lavorgna
- Troy Ludtka
Revisiting the Triple Whammy
Last quarter experienced historic increases in interest rates and prices as well as a negative wealth effect emanating from stocks. This has yet to be felt in an economy that is already shrinking. Could a recession be around the corner? That depends on many factors, not the least of which is Fed decision-making. Our long-held view remains unchanged. The Fed will not raise interest rates anywhere near as much as policymakers or the consensus of economists predicts.
- Joseph Lavorgna
- Troy Ludtka
A Squeezed Consumer
Food and energy consumption is relatively price inelastic. S oaring price s at the gas pump and at grocery stores means consumers have less to spend on discretionary items. This dynamic has become particularly pronounced as real retail sales have declined in three of the last five months — a dynamic unlikely to improve in the near future with interest rates climbing higher.
- Joseph Lavorgna
- Troy Ludtka
Watch Out for Wealth Effects
The aggressive turn in Fed policy beginning late last year has instigated a sharp up-move in interest rates. Accordingly, financial assets have retreated with the S&P 500 and Nasdaq composite ind ices down over 15% and 25% year-to-date. Not only has the expectation of a dramatically increased fed funds rate broadly lifted borrowing rates, but the Fed’s plans to dispose of their $2.7T worth of mortgage-backed securities has additionally propelled mortgage rates. Are home prices ...
- Joseph Lavorgna
Inflation Slowing Upstream
Commodity prices have been high and rising. This is evident from record inflation readings seen in the earlier stages of processing in the producer price report. Recently, there has been a moderation in these crude and intermediate sector growth rates. This deceleration is expected to intensify going forward because of our projection of recessionary-level demand.
- Joseph Lavorgna
What to Watch If the Fed Put Goes “In the Money”
The Fed put exists, but investors may be focusing too much on stock prices. Rather, it is the credit markets that may be more important, because when they seize up, policymakers worry about systemic risks to the financial architecture. Pay attention to the high yield market in particular its most distressed subsector which has been an excellent leading indicator of previous relenting of Fed tightening.
- Joseph Lavorgna
- Troy Ludtka
The Cure for High Prices Is High Prices
Commodities were largely responsible for the acute pressures that sent the headline CPI to 8.5% YoY in March . Inflationary pressures are originating upstream, and firms have been able to pass these price increases downstream to consumers because demand has been strong enough to bear it. However, this is changing for a few reasons. C ommodities prices, namely oil, c oming down substantively in April means that March ’s 8.5% YoY reading was likely the peak of inflation. ...
- Joseph Lavorgna
- Troy Ludtka
Revisiting the Triple Whammy
Last quarter experienced historic increases in interest rates and prices as well as a negative wealth effect emanating from stocks. This has yet to be felt in an economy that is already shrinking. Could a recession be around the corner? That depends on many factors, not the least of which is Fed decision-making. Our long-held view remains unchanged. The Fed will not raise interest rates anywhere near as much as policymakers or the consensus of economists predict s .
- Joseph Lavorgna
- Troy Ludtka
Feast and Famine
Yesterday, the Federal Reserve outlined its plans to reduce its treasury holdings by $30B per month and its mortgage-backed securities by $17.5B beginning June 1 st . This process of “quantitative tightening” will accelerate to -$60B and -$35B for treasuries and MBS respectively in three-months. In anticipation, mortgage rates have moved sharply upward this year, a move that to-date is among the sharpest swings in history. The housing market is likely to bear the brunt of this change in the macr...
- Joseph Lavorgna
What is the Bond Market Telling Us About the Fed?
The swaps market provides an excellent proxy of market expectations for the path of the fed funds rate. Investors expect a sharp rise in interest rates that will be followed by rate cuts within a year or so and a neutral rate that is well below policymakers’ current estimates .
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