Dear Investors,
Moody’s Analytics – Retail sales and inflation
“Retail sales rose in April for only the second time in the last six months. January was the other gain.”
“Spending is continuing to shift back from goods to services.”
“We expect services consumption contributed 1.4 percentage points to growth in the second quarter while goods consumption delivers a modest drag.”
“As 2023 continues, the trend is likely to be one of modest growth in retail sales.”
“Consumers continue to draw down the excess saving done during the pandemic, although support from this source is fading, as evidenced by the rising saving rate.”
“High interest rates are making payments on purchases financed with credit more expensive than consumers are accustomed to. House prices are falling, undermining household wealth. Job growth is slowing.”
Industrial production
“U.S. industrial production surprised to the upside in April, though downward revisions to previous months rained on the parade.”
“April’s 0.5% gain surpassed expectations. However, March’s growth was revised down from 0.4% to 0%. February’s figure was adjusted negatively as well from a 0.2% expansion to 0%.”
“Rising borrowing costs and a pervasive uncertainty about the U.S. economy’s near-term trajectory will weigh on business investment.”
“We expect nonresidential investment is a 0.3-percentage point drag on second-quarter GDP growth.”
Housing market
“Total housing starts ticked higher in April, climbing 2.2% to 1.4 million annualized units. Multifamily starts increased by 3.2%, and single family starts increased by 1.6%.”
“U.S. homebuilders are feeling optimistic for the first time in 10 months.”
“High mortgage rates and poor affordability continue to keep potential buyer traffic suppressed, but current and expected home sales are rising.”
“The 30-year fixed mortgage rate continues to hover in the mid-6% range. But our forecast expects mortgage rates to slowly decline in the second half of 2023 and throughout 2024.”
“Also, house prices are during a modest correction. House prices are forecast to fall 10% from peak to trough, which is a much smaller correction than in the previous housing bubble collapse in the 2000s.”
“Lower house prices will be a plus for housing demand.”
Morgan Stanley
“The challenge of bringing down inflation remains ongoing.”
“While the Fed did raise rates another 25 bps in May, it emphasized that future rate hikes would be dependent on the data, signaling a strong probability of a pause in the hiking cycle, despite the fact that core inflation remains significantly higher than desired and is only showing mixed signs of ameliorating.”
“There is no doubt the economy is slowing, raising more challenges to central banks to juggle financial market stability with a forceful commitment to bringing down inflation.”
“And, ever in the minds of bond investors is the question about how banking issues will affect central bank’s ability to lower inflation.”
100bps Rate cuts inflation
“Financial market futures contracts are now anticipating about 100 bps in rate cuts in the second half of 2023. It should not be a surprise that given 500 bps of rate hikes in a little over a year, various leveraged business models, such as banks, might come under pressure, even if monetary policy tightening was well executed.”
Bank credit conditions
“A key factor in understanding what comes next in the U.S. will be measuring how tight monetary financial conditions have become.”
“Bank credit conditions are clearly on a tightening trajectory, although by how much remains to be seen.”
“However, if we look at government bond yields, credit spreads, the S&P 500 and energy prices, things are looking up, meaning that the movement in these variables does NOT suggest financial conditions are tightening.”
Inflation is not beaten
“Inflation is not beaten, neither in the U.S. nor in most other countries.”
“Even though central banks are at or nearly at peak terminal rates, we believe they will be reluctant to cut rates simply because unemployment rates rise.”
“The Fed and most other central banks need to see higher unemployment rates simply to stop hiking.”
“But, to further complicate matters, central banks must also ensure financial market stability, which may constrain their ability to maintain moderately tight monetary conditions for a long time, pushing out success on the inflation front.”
No big recession this year inflation
“Given that we expect an economic slowdown but no big recession this year, shorter-dated high yield bonds look fair and, if chosen carefully, can potentially generate an attractive return.”
“Recent events continue to be negative for the U.S. dollar. U.S. growth is likely to weaken more than in many other countries, supporting the idea of monetary policy tightening further outside the U.S. If the Fed holds policy rates unchanged to combat inflation in the face of weaker data and/or banking sector stresses, it is likely to be negative for the dollar.”
“If the Fed cuts rates while inflation is still too high in response to economic weakness or financial stability concerns, it is likely to be negative for the U.S. dollar.”
“We continue to like being underweight the dollar versus a basket of developed and emerging market currencies.”
BlackRock
“U.S. stocks hit 2023 highs on hopes for a debt ceiling deal. Yields climbed on odds of another rate hike versus a pause or cuts. We don’t see rate cuts this year.”
“We see wage pressure from worker shortages keeping inflation above policy targets for some time.”
Market backdrop
“First-quarter earnings contracted for the second-straight quarter – but less than expected.”
“Inflation helped revenue and margins as firms passed on higher prices to a still-strong consumer. We think higher financing costs and dwindling savings could start to bite: Earnings expectations look too rosy.”
Sticky inflation makes rate cuts unlikely
“Most developed markets are grappling with a shared problem.”
“Core inflation – or inflation excluding more volatile food and energy prices – is proving more stubborn than expected and remains well above central banks’ 2% targets.”
“The cause is persistent production constraints, especially worker shortages. That is making it difficult to comfortably meet demand.”
“Worker shortages are driving up wages, including in Japan, where wage inflation is at its highest rate since the late 1990s.”
Blackrock on inflation
“We think that means central banks can’t undo any of their inflation-fighting rate hikes any time soon, even if financial markets think the Federal Reserve will start cutting rates before the end of the year.”
“We see the Fed simply taking a breather for now, while it assesses how much economic damage is still to come from the hikes already done.”
“We see recession ahead. But unlike in the past when central banks would cut rates to stimulate a struggling economy, we think the unresolved inflation problem makes that unlikely this time.”