Morning Report: Goldman sees 1 in 3 chance of a recession next year

Vital Statistics:

	Last	Change
S&P futures	4,280	31.2
Oil (WTI)	106.65	0.59
10 year government bond yield		2.01%
30 year fixed rate mortgage		4.28%

Stocks are higher this morning as investors adjust to a new normal with a war in Ukraine. Bonds and MBS are down small.

Goldman cut its estimate for US growth this year from 2% to 1.75%, and it estimates we have a 1 in 3 chance of a recession next year. They are basing this view on the shape of the yield curve. With the Fed reducing its purchases of Treasuries and MBS the shape of the yield curve (in other words the difference between longer-term rates and shorter term rates) is beginning to return to transmitting useful information. Long-term rates in the context of QE have a very low signal-to-noise ratio.

Despite the bearishness on the US economy, the Fed Funds futures have moved to the hawkish side again, with traders seeing a Fed funds rate of 1.75% as the most likely outcome at the end of the year. We will get a fresh dot plot and projections next week at the FOMC meeting, where the market has penciled in a 25 basis point rate hike. Given the war in Ukraine and inflationary pressures, the press conference will be closely watched by investors and journalists.

Robust asset price appreciation lifted household net worth by over $5 trillion in the fourth quarter of 2021. This is from Federal Reserve data. Separately, CoreLogic said that homeowner’s equity rose 29% in Q4. Negative equity fell to about 1.1 million homes. This home equity will probably bring back the “house as ATM” trade as investors tap home equity to refinance credit card debt or remodel.

One of the biggest surprises for me so far has been that some major hedge fund hasn’t blown up as a result of Russian debt bets. When Russia defaulted on its sovereign debt in the late 90s, we saw numerous blowups, including Long Term Capital Management.

So far, junk bond spreads (which is the difference between the yield on CCC and lower rated bonds and Treasuries) are behaving. The market seems relatively sanguine. If things start going sideways in the financial markets, this is going to be your canary in the coal mine. Note the spike at the beginning of COVID. This is when the market for non-QM disappeared almost overnight.