During the past three years, Washington has made three catastrophic errors.
The draconian one-size-fits-all Lockdowns in response to the Covid;
The insane $11 trillion bacchanalia of monetary and fiscal stimulus payment designed to counter the supply-side shutdowns caused by the Virus Patrol;
The mindless Sanctions War on Russia, which has caused global commodity markets to erupt skyward.
The resulting economic and financial dislocations, both global and domestic, are unprecedented and could not have come in a worst context. Prolonged fiscal and monetary excesses prior to February 2020 were already destined to generate an era of reckoning, even before Washington jumped the shark after the Covid panic was ignited by Donald Trump in March 2020.
Consider the course of fiscal and monetary policy over 2003-2019. During that 17-year period, the public debt share of GDP soared from an already high 62% to 111%, and the Fed’s balance sheet exploded under the bailouts of 2008-2009 and QE thereafter from $725 billion to $4.2 trillion. The latter embodied a growth rate of 11.0% per annum over the period, nearly three times the 4.0% growth rate of nominal GDP.
In a word, Washington policy makers had been on a reckless lark for the better part of two decades. It was only a matter of time before an unavoidable policy reversal toward restraint would bring the hothouse prosperity of both Wall Street and main street crashing down.
Public Debt As % of GDP and Fed Balance Sheet, 2003-2019
The history books will surely record, therefore, that it was Trump who foolishly ignited the above depicted ticking financial timebomb. Based on the facts known now and the evidence available then, the prolonged Lockdowns ordered by Trump on March 16, 2020 were one of the most capriciously destructive acts of the state in modern history.
The reason is simple: The Covid was at best a super flu that did not remotely rise to a Black Plague style existential threat to American society, and therefore did not warrant any extraordinary “public health” intervention at all. America’s medical care system was more than equipped to handle the elevated case loads among the elderly and comorbid that actually occurred.
Indeed, the IFR (infection fatality rate) for the under 70-years population has turned out to be so low as to make the brutal economic shutdowns ordered by the Donald and his Fauci-led Virus Patrol tantamount to crimes against the American people.
A thorough-going study by Professor Ioannidis and colleagues across 31 national seroprevalence studies in the pre-vaccination era, for example, shows that the median infection fatality rate of COVID-19 was estimated to be just 0.035% for people aged 0-59 years and 0.095% for those aged 0-69 years. So we are talking about just four-to ten-hundredths of one percent of the infected populations succumbing to the disease.
A further breakdown by age group found that the average IFR was:
0.0003% at 0-19 years
0.003% at 20-29 years
0.011% at 30-39 years
0.035% at 40-49 years
0.129% at 50-59 years
0.501% at 60-69 years.
There is just no beating around the bush. The Lockdowns impacted the livelihoods and social life primarily of the working age and youth populations depicted below, but not in a million years should the heavy hand of the state been brought to bear on their ordinary freedoms to conduct economic and social life as they saw fit.
Nor does the Donald and Fauci’s Virus Patrol get off the hook on the grounds that these dispositive facts about the Covid were not fully known in early March 2020. But to the contrary, the results of a live fire case study involving the 3,711 passengers and crew members of the famously stricken and stranded cruise ship, the Diamond Princess, were fully known at the time, and they were more than enough to quash the Lockdown hysteria.
During late January and February the virus had spread rapidly among the large, close-quartered population of the cruise ship, causing nearly 20% of the population to test positive—about half of which were symptomatic. Moreover, the population skewed elderly as is normally the case on cruise ships, with 2,165 people or 58% over 60-years of age and 1,242 or 33% over 70-years.
So if there was a vulnerable population sample this was it: That is, a stranded population of the mostly elderly in the close quarters of a cruise ship.
But, alas, the known mortality count from the Diamond Princess as of March 13, 2020 was just nine, and ultimately 13, meaning that the overall population survival rate was 99.8%. Moreover, all of these nine deaths were among the 70 years and older population, making the survival rate for even among the most vulnerable sub-population 99.3%,.
And, of course, for the 2,469 persons under 70-years of age on this ship, the survival rate was, well, 100%.
That’s right. Donald Trump and his way-in-over-his-head son-in-law, Jared Kushner, knew or should have known that the survival rate of the under 70-years population on the Diamond Princess was 100%, and that there was no dire public emergency in any way, shape or form.
Under those conditions, anyone with a passing familiarity with the tenets of constitutional liberty and the requisites of free markets would have sent Dr. Fauci, Dr. Birx and the rest of the public health power-grabbers packing.
That the Donald and Jared did not do. Instead, they got led by the nose for month after month by Fauci’s awful crew because basically Trump and Kushner were power-seekers and egomaniacs, not Republicans and certainly not conservatives.
The resulting unnecessary economic wreckage is almost unspeakable. Here are four measures which show that the instant plunge in economic activity triggered by the Lockdowns was simply off-the-charts compared to any prior history.
During Q2 2020, for example, real GDP plunged by 35% at an annualized rate, leaving the declines during the prior 11 post-war recessions (gray columns) far in the dust.
Annualized Change In Real GDP, 1947 to 2022
Likewise, the drop in Q2 employment was in a whole new zip code. During April 2020, the US economy shed 20.5 million payroll jobs—a figure that was 28X larger than the worst job loss of the Great Recession in February 2009 (-747,000).
Monthly Change In Nonfarm Payrolls, 1939-2022
Even industrial production (black line), which was not nearly as heavily impacted as the Leisure & Hospitality (L&H) and other services industries, dropped by 13%, or nearly 4X more than during the worst month of the Great Recession.
At the same time, payrolls at ground zero of the Lockdowns— restaurants, bars, hotels and resorts (purple line)— plummeted by a staggering 46% during April 2020 or by 50X more than any prior monthly decline.
Monthly Change In Industrial Production and Leisure & Hospitality Payrolls, 1950-2022
To call the above a “supply-side shock” is hardly an adequate description. Donald Trump literally decimated the production side of the US economy because he did not have the gumption, knowledge and policy principles necessary to blow off Fauci’s statist attack on America’s market economy.
But what came thereafter was actually worse. The Donald did not care a wit about fiscal rectitude and the surging public debt that was already in place; and actually had demanded time and again even more egregious money-printing than the ship of fools in the Eccles Building were already foisting upon the American economy.
So he loudly clambered on board as the panicked politicians on Capitol Hill and the money-printers at the Fed opened the stimulus sluice gates like never before. The resulting disaster is now coming home to roost, with Joe Biden being the available fall guy, and rightfully so–given the compounding damage being wrought by his truly idiotic proxy war against Russia and the related Sanctions War attack on the global trading and payments system.
Still, at the end of the day the disaster now unfolding was ignited by the Donald from the combustible fiscal and monetary brew he inherited.
And his current dominance of the GOP tells you all you need to know about what lies ahead. The once-upon-a- time “conservative party” in the economic governance of America has become about as useless for the task as teats on a boar.
Needless to say, the 35% annualized plunge in real GDP during Q2 2020 was not caused by “aggregate demand” suddenly petering out. In fact, there was nothing about this unprecedented collapse in economic activity that was remotely related to the prevailing Keynesian demand-driven models.
To the contrary, the Covid contraction was all about the supply side. The latter had been directly monkey-hammered not by reluctant consumers and spenders, but by the marauding Virus Patrol which was shutting down restaurants, bars, gyms, ball parks, movie theaters, malls and countless more via direct “command and control” orders of the state.
To be sure, when you lay off 20.5 million workers in a single-month (April 2020), for instance, that does cause household purchasing power to diminish. But it was also a case of Say’s Law getting its due. Diminished supply was curtailing its own demand.
Indeed, the derivative loss of “aggregate demand” in April 2020 and the months immediately thereafter was tracking the prior loss of production and income. Consequently, the Keynesian solution of replenishing the lost demand with government transfer payments, promised only to draw down existing inventories, pull in more imports from less supply-constrained economies abroad and eventually inflate the price of existing supplies–whether from inventories, domestic production or sources abroad.
In fact, this is exactly what happened in a process of further drastic economic distortion compared to all prior history. In the case of retail inventories, stimmy-fueled “demand” literally sucked the inventory stocks dry. The ratio to sales plunged to an unheard of low of 1.09 months by May 2021.
Retail Inventory-To-Sales Ratio, 1992-2021
Likewise, import volumes erupted like never before. Between the pre-Covid level of $203 billion per month in January 2020 goods imports have soared by 46% to $297 billion per month. That’s a $1.1 trillion annual rate of gain!
China, South Korea, Vietnam and Mexico are undoubtedly grateful. But the only pump Washington’s massive stimmies primed was located mainly in foreign economies. Meanwhile, the US economy struggled all the way through this period because the shutdown orders and fears generated by the Virus Patrol drastically constricted the supply side of the US economy.
Keynesian demand had nothing to do with it!
US Monthly Imports Of Goods, 2012-2021
In fact, the startling eruption of demand for durable goods leaves no doubt about how wrongheaded the giant stimmies actually were. Since money could not be readily spent on the normal slate of services, households went bananas spending their restaurant money savings and their multiple rounds of stimmies on goods that could be delivered to the front door by Amazon.
By the time the stimmies peaked in April 2021, personal consumption expenditures for goods were up by a staggering 79% over prior year. The resulting aberration in the flow of economic activity is plain as day in the chart below.
Y/Y Change In Personal Consumption Expenditures For Durable Goods, 2007-2021
At length, foreign supply chains buckled under the weight of artificial demand for goods stimulated by Washington and European policy-makers—a dislocation that was then compounded when their unhinged Sanctions War against Russia caused petroleum, wheat and other commodity prices to soar, as well.
As best shown by the lead indicator of upstream PPI prices for intermediate processed goods, inflation was brewing in the supply pipeline as early as September 2020, when the annualized rate of change posted at 5.6%. By December 2020 that figure had risen to 17.0%, and then was off to the races: Wholesale prices for processed goods were rising at a 43% annualized rate by March 2021.
As it happened, the downstream CPI began to accelerate in March 2021, but by then the die was cast. Washington’s foolish attempt to massively stimulate “demand” in an economy that was being drastically curtailed on the supply side by its own public health orders and policies had already ignited the most powerful inflationary cycle in 40 years.
Of course, in March 2021, at the peak in the brown line below, Washington was still in full-on stimulus mode. Joe Biden’s $2 trillion American Rescue Act was injecting another round of fiscal stimulus, even as the Fed persevered in buying $120 billion per month of government and GSE debt.
Annualized Rate Of Change, PPI For Intermediate Processed Goods, September 2020 to May 2021
Here is the annualized rate of government transfer payments for the last two cycles—with the latter one, again, being off the charts by a country mile.
During the Great Recession cycle, the maximum increase in the government transfer payment rate was +$640 billion and 36% between December 2007 and May 2008 (i.e. the Bush tax rebate stimulus of that month was actually bigger than Obama’s shovel ready stimulus in February 2009).
By contrast, under the absolute frenzy of stimmies during the Covid cycle, government transfer payments increased from a run rate of $3.15 trillion per annum in February 2020 to $8.10 trillion by March 2021. That’s when the two Trump stimmies and the Biden add-on maxed out at $6 trillion in total spending.
The math of it is staggering. The annualized rate of government transfer payments rose by $4.9 trillion during that period, representing an out-of-this-world gain of 156% in just 13 months!
Is there any wonder that the American economy has been over-run with a “demand shock” of biblical proportion?
Annualized Rate Of Government Transfer Payments, November 2007 to March 2021
An eruption of government spending and borrowing of this staggering magnitude within a matter of months would have normally caused a giant squeeze in the bond pits, sending bond yields soaring skyward. But that didn’t happen: The benchmark yield on the 10-year UST (purple line) actually fell from an already low 3.15% in October 2018 to an absurd 0.55% in July 2020, and remained at just 1.83% thru February 2022.
There is no mystery as to why. During the same period, the Fed’s balance sheet (black line) erupted as never before, rising from $4.1 trillion to a peak of $8.9 trillion by February 2022. That is to say, the Eccles Building monetized a huge share of the stimmy spending, thereby drastically falsifying the entire market for government debt and all the private household and business debt that prices off from it.
Is it any wonder, therefore, that the Virus Patrol was able to run roughshod over the private economy?
Washington compensated one and all for the resulting harm and then some by unleashing a $6 trillion spending bacchanalia in less than 14 months, which was accomplished with barely a dissent from either party to the Washington duopoly because interest rates on government debt had plunged to an all-time low. In turn, that was enabled by the most reckless spurt of money printing and debt monetization in recorded history.
Meanwhile, the stock market and related risk assets rose by 60% on average and by two times, three times, and ten times in some of the hottest “momo” sectors during the same period. America was simply drunk on spending without production, borrowing without saving and money-printing without limit. It all amounted to a phantasmagoria of financial excess like had never before even been imagined, let alone attempted.
Fed Balance Sheet And Yield On 10-Year UST, October 2018 to February 2022
The real skunk on the woodpile, however, is that the rationalization for all of this fiscal and monetary excess —protecting households and businesses from the plunge of economic activity — was essentially bogus. The lost aggregate demand did not need to be replaced with stimulus and free stuff because there had been a prior and equal decline in aggregate production and income.
The only “stimulus” needed to restore the economy’s status quo ante was to send the Virus Patrol packing. That is to say, the Fed’s balance sheet could have stayed at $4 trillion (better yet it could have been returned to the previous path of QT-based shrinkage), even as the fiscal equation could have been pushed toward balance after decades of reckless borrowing.
To be sure, low-wage workers got hit the hardest because they worked in the services sectors slammed by the Virus Patrol, meaning there was an “equity” case for some kind of government help in these cases. But, alas, the help was already there in the form of the automatic shock absorbers that have been erected in the Welfare State over the last decades. We are referring to unemployment insurance, food stamps, ObamaCare, Medicaid and a medley of lesser means-tested programs.
The emphasis here is on means-tested. The so-called Safety Net was fully in place, would have covered 90% of the Covid-Lockdown hardship automatically and therefore required no fiscal bailout legislation at all, to say nothing of the $6 trillion of spending orgies that actually transpired.
The only thing missing was that fact that state unemployment programs generally exclude gig and part-time workers, the very modest segment of the labor force that got clobbered the hardest. But a year’s worth of support at $30,000 per worker (more than they make on average) for an estimated 5 million gig workers not covered by regular state UI programs would have cost $150 billion or just 2.5% of the tidal wave of Covid relief spending that actually occurred.
In any event, the US economy was a financial timebomb fixing to explode in February 2022 when Joe Biden decided to save “Novorossiya” (New Russia) from the Russians, who had intervened to protect their kinsman from the devastating attacks being leveled on the Donbas by the anti-Russian government planted in Kiev by Washington during the February 2014 coup.
The resulting Washington-inspired Sanction War on the largest commodity producer on planet earth was the tripwire for the calamity now underway.
Washington’s three great errors have turned the world upside-down. An economy freighted down with $92 trillion of public and private debt was, is and will remain an accident waiting to happen.
* * *
Republished from David Stockman’s site.
Week Ahead Alchemy: Can Powell Turn a Quarter-Point Move into a Hawkish Hike?
The new year is still young, but the week ahead may be one of the most important weeks of the year. The divergence that the market has been anticipating…
The new year is still young, but the week ahead may be one of the most important weeks of the year. The divergence that the market has been anticipating will materialize. The Federal Reserve will most likely hike by 25 bp on Wednesday, followed by half-point moves by the European Central Bank and the Bank of England the following day. On Friday, February 3, the US will report its January employment situation. It could be the slowest job creation since the end of 2020. The Bureau of Labor Statistics also will release the preliminary estimate of its annual benchmark revisions.
The markets' reaction may be less a function of what is done than what is communicated. The challenge for Fed Chair Powell is to slow the pace of hiking while pushing against the premature easing of financial conditions. In December, ECB President Lagarde pre-committed to a 50 bp hike in February and hinted that another half-point move was possible in March. With the hawks showing their talons in recent days, will she pre-commit again? Amid a historic cost-of-living squeeze that has already kneecapped households, can Bank of England Governor Bailey deliver another 50 bp rate hike and sell the idea that it is for the good of Britain, for which the central bank does not expect growth to return until next year?
United States: The Federal Reserve has a nuanced message to convey. It wants to slow the pace of hikes, as even the hawkish Governor Waller endorsed, but at the same time, persuade the market that tighter financial conditions are necessary to ensure a times convergence of price pressures to the target. Indeed, Fed Chair Powell may warn investors that if it continues to undo the Fed's work, more tightening may be necessary. The market has heard this essentially before and is not impressed. Financial conditions have eased. Consider that the 2-year yield is down 20 bp this year, and the 10-year yield has fallen twice as much. The trade-weighted dollar is off by more than 1.5%. The S&P 500 is up 4.6% after a 7% rally in Q4 22. The Russell 200 has gained nearly 7% this month, on top of the 5.8% in the last three months of 2022.
Last year, Powell drew attention to the 18-month forward of the three-month T-bill yield compared to the cash 3-month bill as a recession tell. It has been inverted for over two months and traded below -100 bp last week, the most inverted since the tech bubble popped over two decades ago. The market seems more convinced that inflation will fall sharply in the coming months. The monetary variables and real economy data, including retail sales, industrial production, and the leading economic indicators, suggest a dramatic weakening of the economy. Yet just like most looked through the contraction in H1 22, seeing it as primarily a quirk of inventory and trade, the 2.9% growth reported in Q4 22 does not change many minds that the US economy is still headed for weaker growth, leaving aside the fuzzy definition of a recession.
The median forecast in Bloomberg's survey is for a 188k rise in January nonfarm payrolls. If accurate, it would be seen as concrete evidence that the jobs market is slowing. This is also clear by looking at averages for this volatile series. For example, in the last three months of 2022, the US created an average of 247k jobs a month. In the first nine months of the year, nonfarm payrolls rose by an average of 418k a month. Average hourly earnings growth also is moderating. A 0.3% rise on the month will see the year-over-year pace slow to 4.3%. That matches the slowest since June 2021. The decline in the work week in December to 34.3 hours spurred narratives about how businesses, hoarding labor, would cut hours before headcount. Yet, we suspect it was partly weather-related, and that the average work week returned to 34.4 hours, which is around where it was pre-Covid.
Benchmark revisions are usually of more interest to economists than the market, but last month's report by the Philadelphia Fed raised the stakes. It looked more closely at the April-June 2022 jobs data. After adjusting for updated data from the Quarterly Census on Employment and Wages, it concluded that job growth was nearly flat in Q2 22. It estimated that only 10,500 net new jobs were created, a far cry from the 1.05 mln jobs estimated by the Bureau of Labor Statistics. The Business Employment Dynamics Summary (released last week) was starker still. It points to a job loss of nearly 290k. Lastly, we note that US auto sales are expected to have recovered from the unexpected almost 6% decline (SAAR) in December. However, the 14.1 mln unit pace would still represent a 6% decline from January 2022, when sales spiked to 15.04 mln.
The Dollar Index continues to hover around 102, corresponding to the (50%) retracement of the rally recorded from January 2021 through September 2022. It has not closed above the 20-day moving average (now ~102.80) since January 3. It remains in the range set on January 18, when it was reported that December retail sales and manufacturing output fell by more than 1%. That range was about 101.50-102.90. Although we are more inclined to see it as a base, the prolonged sideways movement last month saw new lows this month. That said, the next retracement target (61.8%) is near 99.00.
Eurozone: The ECB rarely pre-commits to a policy move, precisely what ECB President Lagarde did last month. Apparently, as part of the compromise with members who at first advocated another 75 bp hike in December, an agreement to raise rates by 50 bp was accompanied by an agreement to hike by another 50 on February 2 and explicitly not rule out another half-point move in March. There was a weak effort to soften the March forward guidance, but the hawks pushed back firmly. The swaps market has about a 70% chance of a 50 bp hike in March rather than a 25 bp move.
The ECB's deposit rate stands at 2.00%, and the swaps market is pricing 125 bp of hikes in the first half of the year. In contrast, the Fed is expected to raise the Fed funds target range by 50 bp. This has been reflected in the two-year interest rate differential between the US and Germany, falling from about 275 bp last August to around 160 bp now. We had anticipated the US premium would peak before the dollar, and there is a lag of almost two months. The direction and change of the interest rate differential often seem more important than the level. In late 2019, before Covid struck, the US premium was near 220 bp, and the euro was a little below $1.12.
There has been a significant shift in sentiment toward the eurozone. The downside risks that seemed so dominant have been reduced. A milder-than-anticipated winter, the drop in natural gas prices, and successful conservation and conversion (to other energy sources) lifted the outlook. Some hopeful economists now think that the recession that seemed inevitable may be avoided. The preliminary January CPI will be published a day before the ECB meets. The monthly pace fell in both November and December. The year-over-year rate is expected to ease to 5.1% from 5.2%, while the core rate slips to 5.1% from 5.2%. The base effect suggests a sharp decline is likely here in Q1, but divergences may become more evident in the euro area. This could see a reversal of the narrowing of core-periphery interest rate spreads.
The EU's ban on refined Russian oil products (e.g., diesel and fuel oil) will be implemented on February 5. It is considering imposing a price cap as it did with crude oil. Diesel trades at a premium to crude, while fuel oil sells at a discount. There have been reports of European utilities boosting purchases from Russia ahead of the embargo. Separately, reports suggest that the EU was still the largest importer of Russian oil in December when pipeline and oil products were included. However, at the end of December, Germany stopped importing Russia's oil delivered through pipelines. This does not count oil and refined producers that first go to a third country, such as India, before being shipped to Europe.
Pullbacks in the euro have been shallow and brief. Most pullbacks since the low was recorded last September, except the first, have mostly been less than two cents. That would suggest a pullback toward the $1.0730 area, but buyers may re-emerge in front of that, maybe around $1.0775. On the top side, the $1.0940 is the (50%) retracement of the euro's losses since January 2021. The euro rose marginally last week, even though it slipped by around 0.2% in the last two session. It has risen in eight of the past 10 weeks.
UK: Without some forward guidance that stopped short of a pre-commitment, the market is nearly as confident that the Bank of England will deliver another half-point hike in the cycle to lift the base rate to 4.0%. The BOE was among the first of the G10 countries to begin the interest rate normalization process and raised the base rate in December 2021 from the 0.10% it had been reduced to during the pandemic. The swaps market projects the peak between 4.25% and 4.50%, with the lower rate seen as slightly more likely.
High inflation readings and strong wage growth appear to outweigh the economic slump. The BOE's forecasts see the economy contracting 1.5% year-over-year this year and output falling another 1% in 2024. The market is not as pessimistic. The monthly Bloomberg survey (51 economists) founds a median forecast for a 0.9% contraction this year and an expansion of the same magnitude next year. The survey now sees only a 0.2% quarterly contraction in Q4 22 rather than -0.4% in the previous survey. The median forecast for the current quarter was unchanged at -0.4%.
Sterling continues to encounter resistance in front of $1.2450, which it first approached in mid-December. Although marginal new highs have been recorded, like the euro, it has been mainly confined to the range set on January 18 (~$1.2255-$1.2435). We are inclined to see this sideways movement as a topping pattern rather than a base, but it likely requires a break of the 1.2225 area to confirm.
Japan: After contracting in Q3 22, the Japanese economy is expected to have rebounded in Q4 (~3.0% annualized pace). Reports on last month's labor market, retail sales, and industrial production will help fine-tune expectations. This month's rise in the flash composite PMI moved back above 50, pointing to some momentum. Still, Tokyo's higher-than-expected January CPI warns of upside risk to the national figure due offers good insight into the national figure, which may draw the most attention. We expect Japanese inflation to peak soon. The combination of government subsidies, the decline in energy prices, including the natural gas it gets from Russia, and the stronger yen (which bottomed in October) will help dampen price pressures. We look for a peak here in Q1 23.
Last week, the dollar moved broadly sideways against the yen as it continued to straddle the JPY130 area. It repeatedly toyed with the 20-day moving average (~130.40) last week but has yet to close above this moving average for more than two months. Rising US and European yields may encourage the market to challenge the 50 bp cap on Japan's 10-year bond. A break of the JPY128.80 area may spur a test on the JPY128.00 area. However, the market seems to lack near-term conviction.
China: Mainland markets re-open after the week-long Lunar New Year holiday. There may be two drivers. The first is catch-up. Equity markets in the region rose. The MSCI Asia Pacific Index rose every session last week and moved higher for the fifth consecutive week. The JP Morgan Emerging Market Currency Index rose about 0.40% last week and is trading near its best level since mid-2022. The euro and yen were little changed last week (+/- <0.20%). The second driver is new news--about Covid and holiday consumption. The PMI is due on January 31, and the median forecast in the Bloomberg survey is for improvement. It has the manufacturing PMI rising to 49.9 from 47.0 and the service PMI jumping to 51.5 from 41.6. The offshore yuan edged up 0.3% last week, suggesting an upside bias to the onshore yuan, against which the dollar settled at CNY6.7845 ahead of the holiday.
Canada: After the Bank of Canada's decision last week, the FOMC meeting, and US employment data in the days ahead, Canada is out of the limelight. It reports November GDP figures and the January manufacturing PMI. Neither are likely to be market movers. The Bank of Canada is the first of the G7 central banks to announce a pause (conditional on the economy evolving like the central bank anticipates) with a target rate of 4.50%. The central bank sees the economy expanding by 1% this year and 1.8% next. It suggests that the underlying inflation rate has peaked and, by the end of the year, may slow to around 2.6%. The swaps market has 50 bp of cut discounted in the second half of the year.
The Canadian dollar held its own last week, rising by about 0.5%, which was second only to the high-flying Australian dollar. The greenback approached CAD1.3300, its lowest level since last November when it traded around CAD1.3225. Quietly, the Canadian dollar has strung together a six-week advance, and since its start in mid-December, it has been the third-best performer in the G10 behind the yen (~6.2%) and the Australian dollar (~6.1%). We are more inclined to see the greenback bounce toward CAD1.3400 before those November lows are re-tested.
Australia: The market's optimism about China recovering from the Covid surge, with the help of government support and attempts to help the property market, has been reflected in the strength of the Australian dollar, which leads the G10 currencies with around a 4.4% gain this year. Yet, changes in the exchange rate and Chinese stocks are not highly correlated in the short- or medium-term. The surge of inflation at the end of last year, reported last week, lent greater credence to our view that the Reserve Bank of Australia will lift the cash target rate by 25 bp when it meets on February 7. In the week ahead, Australia reports December retail sales, private sector credit, and some housing sector data, along with the final PMI readings. The momentum indicators are stretched after a 2.5-cent rally from the low on January 19. It is at risk of a pullback and suggests a break of $0.7080 may be the first indication that it is at hand. We see potential initially toward $0.7000-$0.7040.
Mexico: After falling by nearly 5.25% in the first part of the month against the Mexican peso, the dollar is consolidating. The underlying case for peso exposure remains, but there are two mitigating conditions. First, surveys of real money accounts suggest many are already overweight. Second, the dollar met key target levels in it late-2019 (~MXN18.80), even if not to the February 2020 low (slightly below MXN18.53). On January 31, Mexico reports Q4 GDP. The economy is expected to have expanded by 0.5% after 0.9% quarter-over-quarter growth in Q3 22. Growth is expected to slow further in Q1 23 before grinding to a halt in the middle two quarters. The following day, Mexico reports December worker remittances. These have been a strong source of capital inflows in Mexico. Remittances have a strong seasonal pattern of rising in December from November, which sees remittances slow. However, after surging for the last couple of years, they appear to have begun stabilizing. Also, the optimism around China is understood to be more supportive of Brazil and Chile, for example, than Mexico.
We do not have a very satisfying explanation for the two-day jump in the dollar from about MXN18.5670 to MXN19.11 (January 18-19) outside of market positioning and the possibility of some large hedge working its way through. Still, it seemed like a transaction-related flow rather than a change in the underlying situation. The greenback has trended lower since then and has fallen in five of the last six sessions. It fell to nearly MXN18.7165 ahead of the weekend. Latam currencies, in general, did well, with the top two emerging market currencies coming from there (Brazil and Chile). The Mexican peso rose about 0.4% last week. Last week, the Argentine peso's loss of almost 1.2% gave it the dubious honor of the worst performer among emerging market currencies. It is now off nearly 4.6% for this month. Mexican stocks and bonds extended their rallies. A firmer dollar ahead of the February 1 conclusion of the FOMC meeting may see the peso consolidate its recent gains.
Disclaimerrecession pandemic subsidies bonds sp 500 stocks fomc fed federal reserve currencies canadian dollar euro yuan governor recession gdp oil india brazil mexico japan canada european europe uk germany russia eu china
How far could UK property prices drop and should investors be concerned?
The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years.…
The post How far could UK property…
The more pessimistic analysts believe that UK house prices could drop by as much as 30% over the next couple of years. Property prices leapt alongside most other asset classes over the long bull market that ran relatively uninterrupted over the 13 year period from the start of the recovery from the international financial crisis in 2009 and last year.
Average prices across the country almost doubled from £154,500 in March 2009 to just under £296,000 in October last year, when the market hit its most recent record high. Global stock markets had been in a downward spiral for almost a year while property prices kept climbing.
However, a combination of rising interest rates, up from 0.1% in late 2021 to 3.5% in January 2023 and further hikes expected this year, soaring inflation putting pressure on household budgets and nerves around a recession has seen house prices ease. There still not far off their record highs of late 2022 but the trend is downward.
The big question for homeowners and property investors is just how far could UK residential property prices drop over the next couple of years? How long prices might take to recover from a drop is another important unknown.
First time buyers struggling to get onto the property ladder may welcome a significant drop in UK house prices. Even if higher interest rates mean monthly mortgage costs don’t change much, lower sales prices should reduce the minimum deposits required to secure a mortgage.
However, for anyone who currently owns a home, especially if purchased in the past couple of years towards the top of the market, a significant drop in valuation would be extremely unwelcome. That is particularly the case for home owners at risk of falling into negative equity, which means the market value of their property is lower than the outstanding sum due on the mortgage.
Falling house prices, if the decline is steep, could also create a wider economic crisis and spill over into other parts of the economy and financial markets.
But not everyone agrees UK house prices will drop by anywhere near 30%. Let’s explore the factors that would affect the residential property market over 2023 and beyond and different opinions on how serious a market slump could be. As well as the wider potential consequences that could result if the dive in home valuations turns out to be in line with more negative forecasts.
How much will UK house prices fall by?
The short answer to that question is that we don’t know but the most pessimistic outlook is for drops of up to 30% over the next couple of years. However, there are a number of factors that mean there is a high chance valuations will slide by less. But let’s look at the negative scenario first.
A 30% drop in home valuations sounds like a lot and it is. However, against the backdrop of the last couple of years that kind of fall looks a little less extreme. Prices are up 28% since April 2019 and a 30% fall would take the average price of a home in the UK to around £210,000, where it was in 2016. A less severe 20% drop in prices would see the average price settle at around £235,000, where it was just before the onset of the Covid-19 pandemic and the Bank of England dropping interest rates to just 0.1%.
Mid-term interest rates are likely to have the biggest influence on house prices. At the BoE’s current 3.5% base rate, the best mortgage deals available are 2 years fixed at 4.8% compared to 1% deals available until recently. At an LTV of 60% on a £400,000 mortgage, that would push the monthly rate up to £2300 a month from £1500 a month.
For some borrowers, that is likely to prove problematic. It is also likely to mean lower demand for properties from buyers who might have otherwise decided to move up the property ladder and first time buyers. A drop in demand at higher price brackets due to affordability thresholds being passed will see property prices fall.
Will demand drop enough to lead to a 30% fall? That depends on factors that are currently unknown. How high interest rates go will have a huge influence and that will depend on inflation. There are signs inflation is easing and today the Fed’s preferred gauge for inflation, the personal consumption expenditures (PCE) price index, rose 5.0% in December from a year earlier. That was slower than the 5.5% 12-month gain as of November and the lowest level since September 2021.
In the UK, inflation has also eased from 11.1% year-on-year in October to 10.5% in December. It’s still much higher than in the USA but will hopefully now maintain a consistent downward trend helped by easing energy prices.
There are hopes the Fed will pull back on further interest rate rises from March and that would set a tone that the Bank of England may well follow with a slight delay. The Fed’s base rate is also already higher than in the UK at 4.25% to 4.5%.
If interest rates and, more importantly, mortgage rates do not rise by more than 1% from where they are today it is unlikely valuation drops of as much as 30% eventuate. But if they did what would the consequences be?
What happens if UK house prices fall 30%?
The good news is that even a house price fall as extreme as 30% would be unlikely to lead to systematic issues in the UK’s financial services sector. More people own their homes outright than have a mortgage – 8.8 million to 6.8 million homes. Lloyds Bank, one of the UK’s biggest mortgage lenders recently reported the average LTV of its mortgage portfolio is just 40%.
Even if average LTV is a little higher for other banks, a wave of defaults is unlikely to threaten their stability and infect other areas of financial markets or the wider economy. Mortgage lenders are also reluctant to repossess homes they’ve lent against as it’s an expensive process for them. They will do as much as they can to work with borrowers who are struggling to meet increased mortgage payments.
What does falling property prices mean for investors?
For property investors, it’s really a case of if rental income will continue to cover mortgage payments, or get close enough to mean the investment still adds up. If mortgage payments are likely to exceed realistic rental income over the next few years investors may consider selling up. Unless the property was purchased in the last 2-3 years, that could still mean walking away with a reasonable return.
For investors in the wider financial markets, it seems unlikely that falling property prices, even if up to 30% is knocked off valuations, will see serious contagion spread and spark a crisis.
It’s not impossible that UK property prices could fall by as much as 30% over the next couple of years as a result of higher interest rates and tighter household budgets but the likelihood is the average drop will be less. And in the worst case scenario, wider fallout should be limited. A repeat of the systemic crash that led to the 2008 financial crisis does not seem like a real prospect. Lenders are well capitalised and the system looks strong enough to cope.The post How far could UK property prices drop and should investors be concerned? first appeared on Trading and Investment News. recession pandemic covid-19 global stock markets fed mortgage rates spread recession recovery interest rates stock markets uk
Visualizing Remittance Flows & GDP Impact By Country
Visualizing Remittance Flows & GDP Impact By Country
The COVID-19 pandemic slowed down the flow of global immigration by 27%.
The COVID-19 pandemic slowed down the flow of global immigration by 27%.
And, as Visual Capitalist's Richie Lionell details below, alongside it, travel restrictions, job losses, and mounting health concerns meant that many migrant workers couldn’t send money in the form of remittances back to families in their home countries.
This flow of remittances received by countries dropped by 1.5% to $711 billion globally in 2020. But over the next two years, things quickly turned back around.
As visa approvals restarted and international borders opened, so did international migration and global remittance flows.
In 2021, total global remittances were estimated at $781 billion and have further risen to $794 billion in 2022.
In these images, Richie Lionell uses the World Bank’s KNOMAD data to visualize this increasing flow of money across international borders in 176 countries.
Why Do Remittances Matter?
Remittances contribute to the economy of nations worldwide, especially low and middle-income countries (LMICs).
They have been shown to help alleviate poverty, improve nutrition, and even increase school enrollment rates in these nations. Research has also found that these inflows of income can help recipient households become resilient, especially in the face of disasters.
At the same time, it’s worth noting that these transfers aren’t a silver bullet for recipient nations. In fact, some research shows that overreliance on remittances can cause a vicious cycle that doesn’t translate to consistent economic growth over time.
Countries Receiving the Highest Remittances
For the past 15 years, India has consistently topped the chart of the largest remittance beneficiaries.
With an estimated $100 billion in remittances received, India is said to have reached an all-time high in 2022.
This increasing flow of remittances can be partially attributed to migrant Indians switching to high-skilled jobs in high-income countries—including the U.S., the UK, and Singapore—from low-skilled and low-paying jobs in Gulf countries.
|Rank||Remittance Inflows by Country||2022 (USD)|
|5||Egypt, Arab Rep.||$32,337M|
|47||West Bank and Gaza||$3,495M|
|59||Bosnia and Herzegovina||$2,400M|
|71||Congo, Dem. Rep.||$1,664M|
|106||Hong Kong SAR, China||$571M|
|139||Trinidad and Tobago||$172M|
|148||St. Vincent and the Grenadines||$70M|
|161||Antigua and Barbuda||$35M|
|162||St. Kitts and Nevis||$33M|
|166||Macao SAR, China||$17M|
|170||Sao Tome and Principe||$10M|
|175||Papua New Guinea||$2M|
Mexico and China round out the top three remittance-receiving nations, with estimated inbound transfers of $60 billion and $51 billion respectively in 2022.
Impact on National GDP
While India tops the list of countries benefitting from remittances, its $100 billion received amounts to only 2.9% of its 2022 GDP.
Meanwhile, low and middle-income countries around the world heavily rely on this source of income to boost their economies in a more substantive way. In 2022, for example, remittances accounted for over 15% of the GDP of 25 countries.
|Rank||Remittance Inflows by Country||% of GDP (2022)|
|19||West Bank and Gaza||18.5%|
|29||Bosnia and Herzegovina||10.1%|
|45||St. Vincent and the Grenadines||7.3%|
|47||Egypt, Arab Rep.||6.8%|
|77||St. Kitts and Nevis||2.9%|
|82||Congo, Dem. Rep.||2.6%|
|90||Sao Tome and Principe||2.0%|
|93||Antigua and Barbuda||2.0%|
|127||Trinidad and Tobago||0.5%|
|153||Hong Kong SAR, China||0.1%|
|160||Macao SAR, China||0.07%|
|171||Papua New Guinea||0.01%|
Known primarily as a tourist destination, the Polynesian country of Tonga banks on remittance inflows to support its economy. In 2022, the country’s incoming remittance flows were equal to almost 50% of its GDP.
Next on this list is Lebanon. The country received $6.8 billion in remittances in 2022, estimated to equal almost 38% of its GDP and making it a key support to the nation’s shrinking economy.
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