Morning Report: Citi sees a 50% chance of a global recession this year

Vital Statistics:

 LastChange
S&P futures3,717-50.85
Oil (WTI)102.20-7.24
10 year government bond yield 3.17%
30 year fixed rate mortgage 6.07%

Stocks are lower this morning as investors get more bearish about the economy. Bonds and MBS are up.

Jerome Powell heads to the Hill for his Humphrey Hawkins testimony. The meat of the message is this quote from the prepared remarks:

Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy. We will make our decisions meeting by meeting, and we will continue to communicate our thinking as clearly as possible. Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored.

The Fed Funds futures still anticipate a 89% chance of a 75 basis point hike in July and a 11% chance of a 50 basis point hike. The central tendency for December is a Fed Funds futures rate of 3.5%, which means another 200 basis points are anticipated.

Citigroup sees a 50% chance of a global recession this year. Chief Global Economist Nathan Sheets said: “The global economy continues to be afflicted by severe supply shocks, which are pushing up inflation and driving down growth. But more recently, two further factors have burst onto the scene: Central banks are hiking policy rates with increasing vigor in their fight against inflation, and the global consumer’s demand for goods looks to be softening. We conclude that central banks face a daunting challenge as they seek to wrestle inflation down,” Sheets added. “The experience of history indicates that disinflation often carries meaningful costs for growth, and we see the aggregate probability of recession as now approaching 50%. Central banks may yet engineer the soft—or ‘softish’—landings embedded in their forecasts (and in ours), but this will require supply shocks to ebb and demand to remain resilient.”

Mortgage applications rose 4.2% last week as purchases rose 8% and refis fell 3%. “Mortgage rates continued to surge last week, with the 30-year fixed mortgage rate jumping 33 basis points to 5.98 percent – the highest since November 2008 and the largest single-week increase since 2009,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “All other loan types also increased by at least 20 basis points, influenced by the Federal Reserve’s 75-basis-point rate hike and commentary that more are coming to slow inflation. Mortgage rates are now almost double what they were a year ago, leading to a 77 percent drop in refinance volume over the past 12 months.”

Existing Home Sales fell 3.4% MOM and 8.6% YOY in May, while the median home price reached $400,000. “Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance,” said NAR Chief Economist Lawrence Yun. “Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions.”

Inventory remains an issue, although it is improving. Unsold homes sat at a 2.6 month supply at the end of May. A balanced market is more like 6%. Lawrence Yun is bearish on sales going forward: “Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year,” Yun added. “Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially – almost doubling – to cool home price appreciation and provide more options for home buyers.”

Author: Brent Nyitray

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

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