A US housing recovery has started, and this is a problem for the Fed because home prices have a weight of 40% in the CPI basket, and rising house prices will make inflation more sticky and make it more difficult for the Fed to get inflation down from currently 5% to the FOMC’s 2% inflation target. Our US housing outlook is available here.
Small businesses are reporting it is harder to get a loan, and that normally means lower bank lending growth over the following 12 months, see chart below.
The occupancy rate for hotels in Las Vegas is not showing signs of weakness in consumer services, see chart below.
Running the Fed minutes through a natural language processing model shows that the Fed is starting to turn more dovish, see chart below, suggesting that we are approaching the peak in this rate hike cycle and that the Fed is worrying less about inflation and more about the tighter credit conditions and the associated ongoing slowdown in growth.
None of the indicators the NBER recession committee normally looks at suggest that we are in a recession at the moment, see chart below.
USDJPY is highly correlated with the spread between 10-year interest rates in Japan and the US, and if the BoJ abandons YCC, then we could see a significant appreciation of the yen as Japanese investors move money back from the US and Europe to higher-yielding fixed income in Japan. With inflation in Japan sticky above the 2% inflation target, there is a significant risk that the BoJ could exit YCC within the next six months.
Data from downtowns show that cellphone activity in San Francisco is at 31% of pre-pandemic levels, see chart below. New York is at 74% and Chicago is at 50% of 2019 levels. Boston is at 54% of pre-pandemic levels. This has implications for retail, restaurants, and office.
In this edition, we take a closer look at what’s going on in the labor market across a number of leading indicators including job cut announcements across sectors, initial and continuing jobless claims, and WARN notices (advance notice in cases of plant closings and layoffs). This data may be giving us a warning sign that the labor market is on the cusp of slowing down. The bottom line is that the Federal Reserve is striving to achieve a softening in the labor market to help lower inflation. However, if unemployment rises too quickly, it may increase the risk of a hard landing.
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Home prices are down more in Canada and Germany than in other G7 countries, see chart below.
Counting how many times the words “inflation” and “banks” appear in the Fed’s Beige Book shows that the Fed is starting to focus more on banks and credit conditions and less on inflation, see charts below.
