“It is possible”
Back in December, CNBC published “Why everyone thinks a recession is coming in 2023”, explaining that historically, “When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight of higher interest rates.” Fast forward to the most recent data, and there’s little to shake the idea that the economy is entering, at minimum, a patch of weakness while the Fed remains resolute in raising rates. Regarding the first part of that formulation, the data from the past week hasn’t been very kind to the economic optimist. Retail sales numbers missed expectations. The Empire Fed’s Manufacturing Survey saw general business conditions fall to “its lowest level since mid-2020 and the fifth worst reading in the survey’s history”. And the Philadelphia Fed’s latest survey also showed that “manufacturing activity in the region continued to decline overall”, though the reading was better than expected.
Regarding the second part, the Fed continues to say that it will keep raising rates. This has been confirmed by Bullard, Collins, Mester, Harker, and Logan, with 5% appearing as the latest touchstone. What’s more, Brainard said today that “even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis”. (See Mr. Blanchard for a counterpoint.) Whether you believe the jawboning or not, the Fed Funds curve is pricing in the Fed taking rates up to the 4.75-5% mark by the middle of the year… But it is also pricing in an about-face in the second half.
While weakening data and a Fed set on raising rates is the recipe from CNBC’s article, there is a ray of hope in… housing? While there’s room for “caveat emptor” given the source, Eye on Housing is optimistic that the “Builder Confidence Uptick Signals Turning Point for Housing Lies Ahead”. The easy argument is that it always rains after a dry spell, but circularity aside, the article posits that “It is possible that the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions”, going further to say that “the rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023”. This positive outlook was bolstered by the latest mortgage application data, which showed “mortgage application volume jumped nearly 28% last week compared with the previous week”, though applications for purchase “were 35% lower than the same week one year ago”… We wouldn’t want to get ahead of ourselves regarding this positive data, and it seems like a slim chance that the data is turning around (see Janet Yellen’s warning about using one data point “as an underlying trend” and our previous discussions of some of the more ominous data coming out of the housing market). However, that being said, as a famous philosopher was right in pointing out (during a trip to Colorado, no less), even if the chances are one in a million, “… there’s a chance!”
