Morning Report: Recession risks rising

Vital Statistics:

S&P futures3,93840.25
Oil (WTI)112.280.69
10 year government bond yield 2.85%
30 year fixed rate mortgage 5.42%

Stocks are higher this morning after China cut interest rates overnight. Bonds and MBS are flat.

The Chinese economic situation will be something to watch as that will probably stick a fork in a lot of the commodity inflation we have been seeing. China has a real estate bubble comparable to the one the US experienced in the 1920s and Japan experience in the 1980s. I suspect that countries which experience decades of supernormal growth often create real estate bubbles, which cause epic slowdowns – the Great Depression in the US, the lost decade in Japan.

Risks for a US recession in late 2022 and early 2023 are building, and we are starting to see some strategists become more pessimistic on the economy. “Recession risks are high — uncomfortably high — and rising,” said Mark Zandi, chief economist at Moody’s Analytics. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.” Senior executives from Wells Fargo and Goldman Sachs have echoed this sentiment.

Further evidence is coming from retailer earnings. “While we anticipated a post-stimulus slowdown in these categories … we didn’t anticipate the magnitude of that shift,” Brian Cornell,Target’s chief executive, said in a Wednesday earnings call. “When we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to the high and persistent inflation they’ve been experiencing.”

Recessionary risks will put a ceiling on interest rates, which is why we may have seen the peaks of interest rates already in this tightening cycle. That said, the Fed Funds futures have yet to reflect this changing sentiment.

Lower-credit borrowers are beginning to fall behind in auto loans and credit cards. Delinquencies are rising in these sectors, which should at some point filter through to FHA loans, I suspect. We are still in a historically strong credit environment (stimulus checks plus a healthy labor market) but if we do see a recession credit quality will deteriorate. 30 day mortgage delinquency rates are at 2.8%, which is down 40% from last year.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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