Vital Statistics:
| Last | Change | |
| S&P futures | 4,491 | -5.2 |
| Oil (WTI) | 96.44 | 0.29 |
| 10 year government bond yield | 2.76% | |
| 30 year fixed rate mortgage | 5.06% |
Stocks are flattish as we round out a data-light week. Bonds and MBS are down again.
The assets held by the Federal Reserve hit $8.9 trillion, which should be a high-water mark since the Fed is expected to start reducing its balance sheet relatively soon. Here is a chart of the assets held by the Fed since before the financial crisis of 2008.
It is important to note that there is no historical analog to draw on here. Central banks are a relative newcomer, historically. Woodrow Wilson brought the Federal Reserve into existence in 1913, so these entities haven’t been around all that often. For most of their existence they were the lender of last resort and helped manage the currency. Buying up assets to support the economy is new and it will be interesting to see whether global central banks can stick the landing.
With all of the Fed’s tightening, will the central bank cause a recession? It depends on the timeline. This year? Probably not. The employment market is still red-hot – WalMart is paying new truck drivers $110k to start – and that provides a strong buffer against a slowdown. Second, most of Corporate America took advantage of the ultra-low interest rate environment to refinance their corporate debt and lock in ultra-low rates for the foreseeable future.
That said, watch the slope of the yield curve; particularly the spread between the 10 year bond and the 2 year. Ordinarily it costs more to borrow for 10 years than 2 years, which is a positively-sloping yield curve. When it costs more to borrow for 2 years instead of 10 years, we get an “inverted” yield curve, and that has historically been a pretty strong indicator of a recession in the next 12 – 18 months. The yield curve inverted briefly about a week ago and has bounced back. This will be something to watch going forward.
What are rising rates doing to home prices? Theoretically, if the cost of borrowing rises, then this should be a negative for home prices. We are starting to see some evidence of competitive behavior amongst sellers, according to data from Redfin. “Price drops are still rare, but the fact that they are becoming more frequent is one clear sign that the housing market is cooling,” said Redfin Chief Economist Daryl Fairweather. “It goes to show that there’s a limit to sellers’ power. There is still way more demand than supply, and buyers are still sweating, but sellers can no longer overprice their home and still expect buyers to clamor at their door. That’s because higher mortgage rates are eating into homebuyers’ budgets. As the cooldown continues to set in, it is important that sellers price their home carefully. Homes that sit on the market for several days have a scarlet letter that makes them more difficult to sell. Buyers should be wary of bidding significantly over asking on newly listed homes, and to take a closer look at the homes that have been on the market for more than a week.”
The Daily Tearsheet 