The market has done a reasonably good job this week shaking off some big, large cap tech earnings misses. Weak ad trends at GOOG and MSFT and then last night’s big META whiff. AAPL and AMZON report tonite. The ability to advance when the news isn’t great is actually a good sign and encouraging that we are closer to the end of this drawdown. Market technicals are healing, albeit slowly.
Are we in a recession yet? NO.
Will be in a recession in early 2023? YES.
The Fed’s charge-from-behind with regards to rate hikes has destroyed economic demand and greatly contracted credit conditions. With UST rates up, credit spreads up, and mortgage rates up the likelihood we march into recession in early 2023 grows by the day. It’s just a matter of time.
Three charts for your Thursday:
HOUSING DEMAND IS PLUMMETING
Mortgage applications fell -2% this week and housing buyer demand evaporates amidst a rising rate backdrop. Mortgage rates rose for the 10th week in a row and now sit at the highest level since 2001. A chart of 30y mortgage rates noted below. Tough to have a strong and safe economy when you have a housing market that is completely frozen. That’s where we are headed.
PRIVATE DOMESTIC DEMAND HAS ALSO BEEN HALTED
If you adjust this morning’s GDP report for inventories, trade and government in search of a true picture of private domestic demand, the picture is rather sobering. Just +.1% seasonally adjusted GDP growth. The economy has weakened and is getting weaker quickly.
And lastly, THE YIELD CURVE HAS INVERTED. The market quotes 10y versus 2y UST yields for convenience when evaluating the shape of the yield curve and that has been inverted for a while now. But the Fed has quoted in the past 10y versus either 3mo bill or versus fed funds when they evaluate the shape of the yield curve. 10y UST v. 3mo bills is now inverted. Credit lending will dry up with the deposit rate and the lending rate now upside down. No lending = less economic activity = less job growth = higher recessionary likelihood…Tick, tick, tick.
This all sounds like BAD NEWS but strangely BAD NEWS with regards to the economy will be GOOD NEWS with regard to the pace of future rate hikes. The magic word remains “pause” because when the Fed starts hinting that is where they going, the market will hear “go” and likely rip higher off a base of historically poor investor sentiment and less restrictive monetary policy. Every crisis ends and we’re ten months into this one. #pause
Chief Investment Officer
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