@Paper Chaser that's some interesting research! I'm interested to know if you or anyone has a link to somewhere that tracks the number of WARN notices over time, in an easy-to-read chart. This could be a good real-time indicator.
The prospect of a soft landing certainly starts to feel like a real possibility. I think there will be a lot of tolerance with inflation at 3-4% to not overshoot. I'm going to say that if we have 5 more months like the last two, the July inflation report in August will come in at 4.3%. With healthy job gains still happening and the economy still kicking, as the fears of a recession start to fade and the realization that we may have topped out on interest rates, the outlook on housing is going to change and we may see a legitimate bull run start to take shape.
Yea, as I think about it, most of the economic
measurements suggest a soft landing. The things which don't suggest a soft landing are
omens like the yield curve, the historical record of what the economy does when rates rise quickly, and other indirect things.
However, the reason we watch omens, look to history, and think about the future consequences of things like unaffordable mortgages and financial institutions stuck with depreciated bonds is because that kind of thinking is usually the only warning we get. Recessions often hit people by surprise, and by the time the direct measurement data go bad, it's too late to position oneself to avoid damage.
If the Fed is going to stop doing 0.25% rate hikes when YoY inflation hits 4%, and if 4% arrives in August, we should bear in mind that there are 4 more FOMC meetings until then. So the FFR could go up 25x4=100 basis points by then, to 5.75%. Is that your terminal rate forecast
@Mr. Green ?
Something drastic has happened with the
FFR futures market. Just one week ago, the highest odds were that the FFR would top out at 5.75% in September. Now the futures market suggests 4.75% will be the rate in September! Specifically, the market thinks rates go to 5% this month, and then get cut to 4.75% this summer, and then get cut another 25bp in November or December to end the year at 4.5%.
The CME FedWatch Tool has been stable for a long time, so this week's chaos is very interesting. Did the failure of a couple of specialty banks really change the trajectory of the Fed's rate hiking campaign by 125bp, just days after Powell said bigger rate hikes could be on the way? Would the FOMC ignore high inflation to keep a lid on the banking issues? Is the market panicking?
Maybe some big companies are using FFR futures to hedge the risk to their deposits over FDIC limits. By betting on a scenario where the Fed has to halt and reverse rate hikes within the next 3 months, these depositors are hedging the risk of events that could imperil their deposits. I.e. if more banks collapse, they might lose their deposits but on the other hand the fed will cut rates and they'll make millions on their futures contracts. Plus they'll have access to instant liquidity by trading out of the contracts. Investment banks might be buying up these contracts in anticipation of such demand, or to hedge the swaps they're selling to other companies and banks.
It's hard for me to tell if this is a market overreaction or a problem that is destined to spread, and if businesses and wealthy individuals will make withdraws or spread their non-insured deposits across other bank accounts or treasuries.
On the one hand, the banks which failed were one-of-a-kind in terms of having piles of uninsured assets or by having volatile crypto currency brokerages as clients. Also, the Fed just opened up a new emergency lending facility to prop up regional banks. Finally, the handful of largest banks with >$250B in assets should be safer because they are subject to stricter regulation.
On the other hand, we're back to pre-2008 levels of regulation for most banks, they're all holding the same treasuries which are down 7-8%, and there are tons of nervous people and companies with deposits in excess of the $250k insured amount. Thus there's no reason to think a banking crisis
can't happen. If larger depositors move their funds to treasuries (note how treasury bond prices have gone up quickly) or even shuffle their funds across multiple accounts to maximize FDIC insurance, it will force the banks to sell some of their "held to maturity" bonds and recognize the losses, forcing more selling, and creating a chain reaction as their liquidity ratios drop with each tranch of asset re-characterization and loss recognition. Banks cannot quickly change their policies, and adherence to policies is what bank audits are about. Thus there may have been some reluctance to hedge as conditions changed, and there might still be hesitation since they know audits are coming.
All this uncertainty makes it impossible to invest based on the last few days' events. Bank stocks, preferreds, and bonds are a bit like Schrodinger's Cat. They could be bargains or they could be worthless, and the only way to know is to wait for a future observation to occur.
It's the opportunity cost that keeps me away. If this year is turning out like 2000 or 2008, there will be better deals for those who wait as opposed to those who hop on the first little sale on risk assets.