Sive Morten
Special Consultant to the FPA
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Fundamentals
This week we have few fundamental events, not so much as in some previous weeks. PMI numbers were mixed, making no serious impact on markets. And J. Powell speech to lawmakers has become the most important event.
Market overview
The U.S. dollar slipped on Friday and posted its first weekly decline this month, as traders pared back bets on where interest rates may peak and brought forward their outlook on the timing of rate cuts to counter a possible recession. A significant factor this week has been the fall in oil and commodity prices, which has eased inflation fears and allowed equity markets to rebound. This has eroded the safe-haven bid that has been boosting the dollar against major currencies.
U.S. fed funds futures on Friday priced in a 73% probability of a 75 basis-point increase at the July meeting. But for September the market has fully factored in just a 50-bps rise. The market has also priced in a fed funds rates of 3.31% on Friday, from 3.51% a week ago.
The safe-haven greenback slipped further after data showed new home sales jumped 10.7% to a seasonally adjusted annual rate of 696,000 units last month. May's sales pace was revised higher to 629,000 units from the previously reported 591,000 units.
The University of Michigan consumer sentiment survey showed mixed results, with sentiment worsening in June to 50, from a final reading in May of 58. But the reading on five-year inflation expectations eased to 3.1 from the preliminary 3.3% estimate in mid-June
The dollar, up around 9% this year, has lost some of its shine since investors started betting the Fed could slow the rate-tightening pace following another 75 basis-point increase in July. They now see rates peaking next March around 3.5% and falling nearly 20 bps by July 2023
For now though, Fed Chair Jerome Powell stressed the central bank's "unconditional" commitment to taming inflation. Fed Governor Michelle Bowman also supported 50 bps hikes for "the next few" meetings after July. Analysts noted terminal rate repricing across the developed world as recession fears grow.
The euro slid across the board on Thursday as weaker-than-expected German and French PMI data showed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big rate-hike moves from the European Central Bank. Higher prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 at the height of the coronavirus pandemic. The S&P Global's headline factory Purchasing Managers' Index (PMI) fell to a near two- year low of 52.0 from 54.6
Following the data, money markets priced in about 30 basis points (bps) of ECB rate hikes in July compared to 34 bps on Monday. Traders also trimmed expectations of how much the ECB will hike rates by the end of 2022 to 161 bps, compared to 176 bps on Monday.
Fed Chair Jerome Powell said on Wednesday a recession was "certainly a possibility," reflecting fears in financial markets that the Fed's tightening pace will throttle growth.
The Fed is not trying to engineer a recession to heel inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn, Powell said at a hearing of the U.S. Senate Banking Committee.
Fed Chair Jerome Powell had cited the initial read of 3.3% -- a possible early warning that months of 8%-plus consumer price inflation were beginning to undermine public faith in the Fed's ability to contain price pressures -- as one reason policymakers supported the big rate increase in June.
U.S. initial jobless claims fell to a seasonally-adjusted 229,000 for the week ended June 18. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March.
The International Monetary Fund on Friday slashed its U.S. economic growth forecast as aggressive Federal Reserve interest rate hikes cool demand but predicted that the United States would "narrowly" avoid a recession. In an annual assessment of U.S. economic policies, the IMF said it now expects U.S. Gross Domestic Product to grow 2.9% in 2022, less than its most recent forecast of 3.7% in April. For 2023, the IMF cut its U.S. growth forecast to 1.7% from 2.3% and it now expects growth to trough at 0.8% in 2024.
Georgieva said the responsibility to restore low and stable inflation rests with the Fed, and that the fund views the U.S. central bank's desire to quickly bring its benchmark overnight interest rate up to the 3.5%-4% level as "the correct policy to bring down inflation." The Fed's current policy rate ranges from 1.50% to 1.75%.
Two cents on real estate market
As it is mentioned above, the sales of new homes have increased this months and many investors become inspiring with this moment, suggesting that everything stands on a right way. Here we show you few charts that identifies coming disaster in a near term perspective. First is, due to significant mortage rate rising to 5.8%. According to Insider's calculations using data from the US Census Bureau, the Department of Housing and Urban Development, Freddie Mac, and the National Association of Realtors, the average mortgage payment is $2,064 on a 30-year fixed mortgage, and $3,059 on a 15-year fixed mortgage i.e. households pay 2500$ monthly, on average. In general, you could see that the rate is coming to the threshold level of subprime crisis in 2008:
Although we see May increase for new home sales, but this is just a single number. New homes might be bought by real estate companies, funds for re-selling later. At the same time we see that existing home sales are dropping stably and already at 2-year lows:
this leads to disproportions on real estate market. Historically, the real estate loan rate and the price are moving in the same direction. Take a look at this chart:
Here we could see two things. First is, the spread is already two times greater than before 2008 subprime crisis. Second - the pace of real price growth is faster than at the eve of 2008. As you understand, it is poor relief that new sales have risen in May. With slowdown and demand collapse on mortgage market - the building sector could get the deadly hit.
What J. Powell has said
The major news of the week has become the head of the Fed with his speech to Congress - whe he has disavowed the connection between the Russia's war special operation in Ukraine and inflation in the United States. And the reason is absolutely not in relation between the United States and Russia, but the situation per se, when the head of the Central Bank does not agree with the logic of the President, suggesting that the US monetary authorities can't provide any clear public explanation of the causes of the current inflationary catastrophe. It should be noted that the situation in EU is similar, as ECB is not able to present any more or less distinct strategy as well. At the same time, the feeling of catastrophe is growing, especially if we take into account the relationship between the money supply and stock indices:
Other word speaking, if Fed tightening continues - the markets will begin to fall. Actually, they are already declining, but this is just the beginning. At the same time, aggregate demand and household savings are already falling, and their debts are growing:
But the decline in consumer demand automatically means the decline of GDP. So the picture becomes even more gloomy. As we already mentioned many times here - a full-fledged structural crisis since the fourth quarter of last year is began, which is similar to the crisis of 1930-32, and it should last for quite a long time, at least 5 more years.
Based on recent Fed members speeches, including JP, they already understand this. Although they could not understand the mechanics of the crisis, but they have realized already that the standard tools of "economics" have limited application to resolve the problem. And today, the main task of all politicians and experts is not economic policy, but attempts to absolve themselves of personal responsibility for the circumstances.
Conclusion
First thing that we wold like to say - don't be deceived by temporal pullbacks on any market, especially on stock market. This is the trap, if even sometimes they could look reliable. Stock market is turning to long term bearish trend, but big banks need to make illusion of bullish reversals from time to time to trigger the rallies that they later will use to close their long positions. One the pullbacks has happened on Friday. Real reversal is possible only when economy becomes healthy and strong. Now it is not the case - the US Consumer Sentiment stands worst for the whole history of observations, and the same situation on other indicators, such as economy conditions etc., and not only in the US:
Thus, we see tectonic transition of monetary (and political) authorities to the acknowledgement of deep and ongoing crisis. As this process should keep going - as internal political showdowns, as serious economic conclusions will take place. The latter supposedly inevitably triggers as hysterical and inadequate policy fluctuations (for example, if some or few Central Banks start or keep the rate hike and money printing at the same time). if hidden QE (i.e. money printing) resumes in the EU or the USA, the stock markets could show solid rally, but it becomes the swan song of final paroxysms before a colossal collapse. This irrational steps might be combined with absolutely correct actions on reducing the debt burden. Simultaneously Brussels could cut the donation of highly indebted eastern and southern members of the European Union.
EU by far stands as major loser of ongoing crisis, caring the bulk of the sanctions burden. The major countries have awful trading balance in recent months that they have to close somehow, as they need to finance the deficit. With thin debt market they could either cut budget spending, which has a direct hit on social sphere or... right - printing and printing more...
With the previously mentioned other EU problems, we do not see reasons to change our long-term view, that EUR should feel worse than USD. Thus, we keep two our downside targets valid - 0.97 and 0.9 that could be reached within 3-6 months. Geopolitical risks also is a big component but we will consider it in our Gold market report tomorrow.
Next week, Friday, July 1, will bring latest euro area inflation readings, which in turn could determine whether the ECB will deliver bigger interest rate hikes after a quarter-point move flagged for July. Second important data is the US consumer confidence. Monday's pending home sales and Tuesday's Case-Shiller home price index should show how much rising mortgage rates are biting, while the May personal consumption expenditures price index – an inflation indicator watched by the Fed – is due on Thursday.
To be continued.
This week we have few fundamental events, not so much as in some previous weeks. PMI numbers were mixed, making no serious impact on markets. And J. Powell speech to lawmakers has become the most important event.
Market overview
The U.S. dollar slipped on Friday and posted its first weekly decline this month, as traders pared back bets on where interest rates may peak and brought forward their outlook on the timing of rate cuts to counter a possible recession. A significant factor this week has been the fall in oil and commodity prices, which has eased inflation fears and allowed equity markets to rebound. This has eroded the safe-haven bid that has been boosting the dollar against major currencies.
U.S. fed funds futures on Friday priced in a 73% probability of a 75 basis-point increase at the July meeting. But for September the market has fully factored in just a 50-bps rise. The market has also priced in a fed funds rates of 3.31% on Friday, from 3.51% a week ago.
The safe-haven greenback slipped further after data showed new home sales jumped 10.7% to a seasonally adjusted annual rate of 696,000 units last month. May's sales pace was revised higher to 629,000 units from the previously reported 591,000 units.
The University of Michigan consumer sentiment survey showed mixed results, with sentiment worsening in June to 50, from a final reading in May of 58. But the reading on five-year inflation expectations eased to 3.1 from the preliminary 3.3% estimate in mid-June
The dollar, up around 9% this year, has lost some of its shine since investors started betting the Fed could slow the rate-tightening pace following another 75 basis-point increase in July. They now see rates peaking next March around 3.5% and falling nearly 20 bps by July 2023
For now though, Fed Chair Jerome Powell stressed the central bank's "unconditional" commitment to taming inflation. Fed Governor Michelle Bowman also supported 50 bps hikes for "the next few" meetings after July. Analysts noted terminal rate repricing across the developed world as recession fears grow.
"The Fed has said it will do its best to bring down inflation without dealing a significant blow to the economy," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington. But if a soft landing should ultimately prove elusive, then the Fed would likely have to change course and start to slash rates. So while the rate debate remains fluid, for now inflation fears have given way to hopes of looser policy if things really deteriorate."
The euro slid across the board on Thursday as weaker-than-expected German and French PMI data showed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big rate-hike moves from the European Central Bank. Higher prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 at the height of the coronavirus pandemic. The S&P Global's headline factory Purchasing Managers' Index (PMI) fell to a near two- year low of 52.0 from 54.6
"The (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. The ratio has sharply dropped relative to the U.S.," said Mazen Issa, senior FX strategist in a research note. "This dynamic is typically consistent with further U.S. dollar resilience. This could be bolstered as recession fears mount."
Following the data, money markets priced in about 30 basis points (bps) of ECB rate hikes in July compared to 34 bps on Monday. Traders also trimmed expectations of how much the ECB will hike rates by the end of 2022 to 161 bps, compared to 176 bps on Monday.
Fed Chair Jerome Powell said on Wednesday a recession was "certainly a possibility," reflecting fears in financial markets that the Fed's tightening pace will throttle growth.
The Fed is not trying to engineer a recession to heel inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn, Powell said at a hearing of the U.S. Senate Banking Committee.
Fed Chair Jerome Powell had cited the initial read of 3.3% -- a possible early warning that months of 8%-plus consumer price inflation were beginning to undermine public faith in the Fed's ability to contain price pressures -- as one reason policymakers supported the big rate increase in June.
U.S. initial jobless claims fell to a seasonally-adjusted 229,000 for the week ended June 18. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March.
The International Monetary Fund on Friday slashed its U.S. economic growth forecast as aggressive Federal Reserve interest rate hikes cool demand but predicted that the United States would "narrowly" avoid a recession. In an annual assessment of U.S. economic policies, the IMF said it now expects U.S. Gross Domestic Product to grow 2.9% in 2022, less than its most recent forecast of 3.7% in April. For 2023, the IMF cut its U.S. growth forecast to 1.7% from 2.3% and it now expects growth to trough at 0.8% in 2024.
"We are conscious that there is a narrowing path to avoiding a recession in the U.S.," IMF Managing Director Kristalina Georgieva told a news conference, noting that the outlook had a high degree of uncertainty.
Georgieva said the responsibility to restore low and stable inflation rests with the Fed, and that the fund views the U.S. central bank's desire to quickly bring its benchmark overnight interest rate up to the 3.5%-4% level as "the correct policy to bring down inflation." The Fed's current policy rate ranges from 1.50% to 1.75%.
"We believe this policy path should create an upfront tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed's decision to reduce its balance sheet," she said.
Two cents on real estate market
As it is mentioned above, the sales of new homes have increased this months and many investors become inspiring with this moment, suggesting that everything stands on a right way. Here we show you few charts that identifies coming disaster in a near term perspective. First is, due to significant mortage rate rising to 5.8%. According to Insider's calculations using data from the US Census Bureau, the Department of Housing and Urban Development, Freddie Mac, and the National Association of Realtors, the average mortgage payment is $2,064 on a 30-year fixed mortgage, and $3,059 on a 15-year fixed mortgage i.e. households pay 2500$ monthly, on average. In general, you could see that the rate is coming to the threshold level of subprime crisis in 2008:
Although we see May increase for new home sales, but this is just a single number. New homes might be bought by real estate companies, funds for re-selling later. At the same time we see that existing home sales are dropping stably and already at 2-year lows:
this leads to disproportions on real estate market. Historically, the real estate loan rate and the price are moving in the same direction. Take a look at this chart:
Here we could see two things. First is, the spread is already two times greater than before 2008 subprime crisis. Second - the pace of real price growth is faster than at the eve of 2008. As you understand, it is poor relief that new sales have risen in May. With slowdown and demand collapse on mortgage market - the building sector could get the deadly hit.
What J. Powell has said
The major news of the week has become the head of the Fed with his speech to Congress - whe he has disavowed the connection between the Russia's war special operation in Ukraine and inflation in the United States. And the reason is absolutely not in relation between the United States and Russia, but the situation per se, when the head of the Central Bank does not agree with the logic of the President, suggesting that the US monetary authorities can't provide any clear public explanation of the causes of the current inflationary catastrophe. It should be noted that the situation in EU is similar, as ECB is not able to present any more or less distinct strategy as well. At the same time, the feeling of catastrophe is growing, especially if we take into account the relationship between the money supply and stock indices:
Other word speaking, if Fed tightening continues - the markets will begin to fall. Actually, they are already declining, but this is just the beginning. At the same time, aggregate demand and household savings are already falling, and their debts are growing:
But the decline in consumer demand automatically means the decline of GDP. So the picture becomes even more gloomy. As we already mentioned many times here - a full-fledged structural crisis since the fourth quarter of last year is began, which is similar to the crisis of 1930-32, and it should last for quite a long time, at least 5 more years.
Based on recent Fed members speeches, including JP, they already understand this. Although they could not understand the mechanics of the crisis, but they have realized already that the standard tools of "economics" have limited application to resolve the problem. And today, the main task of all politicians and experts is not economic policy, but attempts to absolve themselves of personal responsibility for the circumstances.
Conclusion
First thing that we wold like to say - don't be deceived by temporal pullbacks on any market, especially on stock market. This is the trap, if even sometimes they could look reliable. Stock market is turning to long term bearish trend, but big banks need to make illusion of bullish reversals from time to time to trigger the rallies that they later will use to close their long positions. One the pullbacks has happened on Friday. Real reversal is possible only when economy becomes healthy and strong. Now it is not the case - the US Consumer Sentiment stands worst for the whole history of observations, and the same situation on other indicators, such as economy conditions etc., and not only in the US:
Thus, we see tectonic transition of monetary (and political) authorities to the acknowledgement of deep and ongoing crisis. As this process should keep going - as internal political showdowns, as serious economic conclusions will take place. The latter supposedly inevitably triggers as hysterical and inadequate policy fluctuations (for example, if some or few Central Banks start or keep the rate hike and money printing at the same time). if hidden QE (i.e. money printing) resumes in the EU or the USA, the stock markets could show solid rally, but it becomes the swan song of final paroxysms before a colossal collapse. This irrational steps might be combined with absolutely correct actions on reducing the debt burden. Simultaneously Brussels could cut the donation of highly indebted eastern and southern members of the European Union.
EU by far stands as major loser of ongoing crisis, caring the bulk of the sanctions burden. The major countries have awful trading balance in recent months that they have to close somehow, as they need to finance the deficit. With thin debt market they could either cut budget spending, which has a direct hit on social sphere or... right - printing and printing more...
With the previously mentioned other EU problems, we do not see reasons to change our long-term view, that EUR should feel worse than USD. Thus, we keep two our downside targets valid - 0.97 and 0.9 that could be reached within 3-6 months. Geopolitical risks also is a big component but we will consider it in our Gold market report tomorrow.
Next week, Friday, July 1, will bring latest euro area inflation readings, which in turn could determine whether the ECB will deliver bigger interest rate hikes after a quarter-point move flagged for July. Second important data is the US consumer confidence. Monday's pending home sales and Tuesday's Case-Shiller home price index should show how much rising mortgage rates are biting, while the May personal consumption expenditures price index – an inflation indicator watched by the Fed – is due on Thursday.
To be continued.