This Was A Crazy News Week. Here Is What You Need To Know Heading Into The Weekend | (12.16.22)
“To lose patience is to lose the battle.” - Mahatma Gandhi
What You Need To Know Heading Into The Weekend:
• This has been a relatively crazy news week with CPI coming in lower than expected and The Fed raising its benchmark interest rate, the “Federal Funds Rate,” by half a percentage point (50bps) — which now sits at a range of 4.25% - 4.50%. This was done in an attempt to continue combatting high inflation, which reached 6.00% in November.1 The move was expected by nearly all market participants. However, the Fed's updated projections, which forecast an additional 75bps in cumulative rate hikes during 2023 (to reach a Federal Funds Rate range of 5.00% to 5.25%) did spook investors. In addition to clues regarding the future of rate hikes, the Fed’s projections also included a downgrade to the outlook for economic growth in 2023, from 1.20% to 0.50%. Moreover, the Fed is forecasting a rise in the unemployment rate from ~3.7% to ~4.6% over the next year. Ultimately, the Fed has doubled down on the message that it is willing to accept an economic downturn in order to curb inflation if that is what it takes.
TL;DR — The Fed did what it said it was going to do (50bps hike) and expressed its intent to continue tightening its grip on monetary policy.
• S&P Global reported updated figures for the Purchasing Managers’ Index (“PMI”), which measures the level of a diffusion index based on surveyed purchasing managers within the servicing industry. A “diffusion index” is an index that measures the breadth of employment changes across industries. Essentially, these surveyed purchasing managers are asked to rate the relative level of business conditions including factors such as employment, production, new orders, prices, supplier deliveries, and inventories. An index reading above 50 indicates industry expansion whereas a reading of 49.99 or below indicates contraction. Today’s reading came in at 44.4, which was below both the pre-release market expectation of 46.5 and last month’s reading of 46.2.2 Simply put, the market had expected a month-over-month improvement in reported conditions, and that is not what we saw. According to this data, the continued decline in the U.S. private sector’s output can be attributed to weaker demand, inflation, and rising interest rates.
TL;DR — The U.S. private sector is self-reporting worse than anticipated conditions regarding employment, production, new orders, prices, supplier deliveries, and inventories.
Chart Of The Day:
The AEI Housing Center published the latest AEI Housing Market Indicators (HMI) which includes their projections for home price appreciation through 2023. In this report (and the grey box below) AEI states that it expects a -10-15% decline in home values from the peak valuations seen in June 2022. Further, they anticipate a -15-20% decline by the year-end of 2023 and 2024.
Year-Over-Year Rate of Hope Price Appreciation (“HPA”)3
TL;DR — AEI Housing Center believes home values will continue to move sharply down from the summer 2022 peak.
Source: U.S. Federal Reserve.
Source: S&P Global — S&P Global Flash US Composite PMI.
Source: AEI Housing Center — The Daily shot Brief.