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The consensus continues to downgrade growth expectations for Europe, raising questions about ECB rate hikes and the rising risk of loan losses and defaults in Europe, see chart below.
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There is more pedestrian traffic in Times Square, but current levels are still 25% below normal, see chart below.
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We updated our oil price forecasting model, and while sanctions continue to argue for higher oil prices, the downward pressure is significant from the Strategic Petroleum Reserve release, growing supply, and slowing global growth. As a result, our econometric model points to lower oil prices over the coming 18 months, see charts below.
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U.S. Retirement Assets: Amount in Pensions and IRAs
https://crsreports.congress.gov/product/pdf/IF/IF12117Reactions of household inflation expectations to a symmetric inflation target and high inflation
https://www.dnb.nl/media/2dzn0i2m/working_paper_no-_743.pdfRussia Sanctions and Cryptocurrencies: Policy Issues
https://crsreports.congress.gov/product/pdf/IN/IN11939See important disclaimers at the bottom of the page.
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There are some very early signs that the economy is starting to cool down, with layoffs rising in startups and some housing indicators starting to roll over from high levels. But the big picture remains that high-frequency indicators show that the economy is still strong. Most noteworthy this week was the decline in jobless claims. The solid data is consistent with the consensus expectation of nonfarm payrolls coming in at 330K next week and the unemployment rate falling from 3.6% to 3.5%.
Looking ahead, with the virus subsiding, we should begin to see a shift away from goods toward services. The chart below shows that this shift has not started yet. The surprise has been that consumer goods spending has continued to be so strong. But with more people flying, eating at restaurants, staying at hotels, and going to amusement parks, we should over the coming quarters see growth in consumer services accelerate, and spending on consumer goods begin to slow down.
The trading implication for equity and credit markets is to be long consumer services and short consumer goods. For the Fed the implication is that rate hikes continue. Read our slowdown chart book.
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With tech and venture capital taking a severe hit, layoffs at startup companies have started to increase, see chart below. The Fed is trying to destroy demand, including demand for labor, and this is early evidence that they are succeeding.
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The total value of the US-based venture capital private company universe is down almost 60% over the past six months, and with a rising risk of a US recession, there is more downside from here. The crash in venture capital will continue until the hard landing is behind us.
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Wheat prices and barley prices are up 50% not only because Ukraine and Russia combined account for 30% of global wheat trade but also because of bad weather slowing the US spring wheat planting progress, see chart below.
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We have updated our credit market chartbook, and the conclusion is that the Fed wants to see wider spreads in both IG and HY to get inflation down. There is also a rising risk that Fed rate hikes will result in a recession, triggering additional spread widening for both IG and HY spreads.
The bottom line is that with inflation currently at 8% and the Fed’s inflation target at 2%, it is too early for markets to declare victory. Credit spreads need to go wider until we have certainty about inflation coming down to 2% and certainty that we will not have a hard landing.
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The charts below show that traffic of prospective buyers of new homes is declining, homebuilder confidence is declining, weekly data for mortgage purchase applications has started to move down, consumer plans to buy a new home have softened, home sales are coming down from their recent peak, leading indicators for home prices are rolling over, and mortgage originations have started to come down, in particular for 30- to 49-year olds. These are all signs that the housing market has started to cool down. This is what the Fed would like to see. The question is if we will get a soft or a hard landing. View the full report.
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