Rate Watch To Begin March!

We are coming out of a busy week: home prices were lower than expected, but pending sales were higher than expected (the drop in rates in December-January helped get things going).

The pending home sales numbers prove to me that there is pent-up demand on the sidelines waiting for somewhat more favorable conditions to make moves.

Also, we heard from Fed members who warned we may need rates higher for longer. All of this put some heavy pressure on rates.

It seems like the markets started 2023 with the hopes of a sooner-than-expected Fed pivot. However, they are digesting the inflation, labor, and consumer data and realizing that we may be in this environment longer than hoped.

Let’s discuss this week’s calendar and then we’ll hop into why the Fed can’t move rates up like they did in the 1980s.

Monday

• Factory Orders

• Fed Chairman Powell Testifies to Senate
• Wholesale Inventories
• Consumer Credit

• ADP Employment
• US Trade Balance
• Fed Chairman Powell Testifies to House
• Job Openings
• Beige Book

• Jobless Claims
• Fed Gov Waller Speaks

• Employment Report
• Unemployment Numbers
• Federal Budget

Chart Check

As I mentioned last week, the 10yr will be heading higher. It is making its way to the October 2022 highs. I expect it to test that resistance line and then drop down from it.

If it breaks through, however, then it will be in price discovery mode as it searches for a new resistance/ceiling.
 

The following is a very summarized version of why I think the Fed will be forced to bring rates down in the near future.

1. Shock to the economy – This is similar to what we saw in the Fall of 2022 in the UK when the Bank of England stepped in to provide liquidity to a failing pension. If there is some sort of economic shock in the US (failure/default of a pension, bank, hedge fund, war, etc) the Fed will bail them out or provide liquidity to keep the lights on. They have done this before and it’s part of their playbook.  

2. Corporate Earnings – with rates rising, the cost of doing business increases. We have already seen a list of companies report weaker quarterly numbers and provide a weak outlook. We have also seen (despite recent labor reports) a lot of corporations laying off employees, especially in the tech industry.

3. Defaulting on Debt (both consumer and corporate) – over a fifth of companies are “zombie” companies, which means they don’t make enough money to afford the interest payments alone on their debt. What they do when their loans are due is refinance them into new loans.

4. Recession – All of the items mentioned so far put the economy at risk of recession. There are 2 main weapons the Fed has to fight recession: controlling the monetary supply and manipulating interest rates. To prevent a full blown panic/recession, the Fed will cut rates and provide liquidity to get the economy moving again.

5. It will bankrupt the Fed – The Fed is the number one holder of US debt. Every time they increase rates, they are increasing their own payments. The Fed is close to paying $1 Trillion/yr in interest.

6. The Fed’s Plan Works – We have seen inflation ease since last summer so who’s to say that the Fed’s plan isn’t working? They just acted way too late as they (incorrectly) thought inflation was “transitory.” However, should the increased rate environment bring inflation back down, then we will be in this walking-on-eggshells environment for a little bit longer.

I always said the Fed will decrease rates in time for the presidential re-election campaign and still believe that to be true unless something shocking pops up which requires immediate Fed intervention.

I am just scratching the surface of each of these.

I know there is fear in the markets right now, but the Fed still has plenty of ammunition to push a recession out further.

Instead, I see this “fearful” environment as an opportunity. The opportunity to get your home, have less competition, gain market share, whatever it is you're looking to do! Fear paralyzes people so those who make moves will come out ahead in the long term.