Americans Have Almost Depleted Excess Savings, SF Fed Study Says
Excess savings US households built up during the pandemic will probably be exhausted in the current quarter, according to research from the Federal Reserve Bank of San Francisco, removing a key support for consumer spending that has boosted the US economy this year.
“Our updated estimates suggest that households held less than $190 billion of aggregate excess savings by June,” San Francisco Fed researchers Hamza Abdelrahman and Luiz Oliveira said in a blog post published Wednesday on the bank’s website.
“There is considerable uncertainty in the outlook, but we estimate that these excess savings are likely to be depleted during the third quarter of 2023.”
Earlier this year, Abdelrahman and Oliveira published research estimating $500 billion of excess savings remained on household balance sheets as of March 2023, after peaking at $2.1 trillion in August 2021. (…)
- Walmart beats expectations for sales and profit and raises its full-year forecast. (CNBC)
Some Fed Officials Are Turning Cautious about Raising Rates Too High Central bank officials face a puzzle as inflation slows, but economic activity is firmer than anticipated
Minutes of the July policy meeting, released Wednesday, said some officials thought the risks of raising rates too much versus too little “had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening.”
At the same time, officials still saw “significant risks” that inflation might not fall as much as they expect, which could require them to raise rates again this year, the minutes said. (…)
While all 11 voters on the committee voted in favor of a rate increase at their meeting last month, two of 18 officials who participated in the deliberations said they would have supported leaving rates unchanged, the minutes said. (…)
The Atlanta Fed GDP Now: Latest estimate: 5.8 percent — August 16, 2023
Ed Yardeni:
The economy isn’t landing; it’s flying high. Following better-than-expected July reports for housing starts and industrial production this morning, the Atlanta Fed’s GDPNow tracking model raised Q3’s real GDP growth rate to 5.8% (saar) from 5.0%, after raising it from 4.1% yesterday on a better-than-expected July retail sales report. Consumer spending and residential investment are now tracking at 4.8% and 11.4%.
Positive economic surprises are bearish for bonds.
- Single-family housing starts jumped 6.7% to 983,000 units (saar) last month. They rose 9.5% y/y, led by the West, where single-family starts soared 28.5%. A shortage of existing homes for sales is boosting new home sales despite mortgage rates rising above 7.00%.
- In July, total industrial production increased 1.0% m/m following declines in the previous two months (chart). Manufacturing output rose 0.5% in July; the production of motor vehicles and parts jumped 5.2%, while factory output elsewhere edged up 0.1%. The index for mining moved up 0.5%, and the index for utilities climbed 5.4% as very high temperatures in July raised demand for cooling.
Goldman Sachs:
In the US, we expect real GDP growth to slow to an above-consensus 2.0% this year on a Q4/Q4 basis, reflecting a negative impulse from tighter financial conditions and additional drags from tighter bank lending. We see a below-consensus 20% probability of entering a recession over the next year as we think taming inflation will not require a recession.
We expect core PCE inflation to decline to 3.4% by Dec 2023, reflecting continued supply chain recovery, a decline in shelter inflation, and slower non-housing services inflation as the labor market continues to rebalance. We expect the unemployment rate to end the year at 3.5% and remain there for the next few years.
We believe the Fed’s hiking cycle is now complete and that the Fed will remain on hold at the current Fed funds rate range of 5.25-5.5% into 2024. We expect the first rate cut to come only in 2Q24 and to proceed at a 25bp/quarter pace, with the Fed funds rate range likely ultimately stabilizing at 3-3.25%, though we see some uncertainty around that pace.
In China, we expect real GDP growth to accelerate to 5.4% yoy in 2023 off the back of China’s post-reopening recovery. While recent economic data remains sluggish, we expect sequential growth to improve somewhat in H2 owing to a diminishing drag from destocking, step up in policy easing measures, and stabilization of Chinese exports. That said, significant uncertainties remain around the property sector downturn and its impact on the rest of the economy.
In China, following a shorter-than-expected reopening impulse, medium-term challenges such as demographics, the multi-year property downturn, local government implicit debt problems, and geopolitical tensions may start to become more important for the growth outlook. As such, we expect lower and below-consensus growth in 2024 [4.5%] and 2025.
Bond Yield Hits Highest Since 2008 The yield on the 10-year U.S. Treasury note closed at a 15-year high, threatening steeper costs for borrowers and raising concern about the potential fallout in the stock, bond and housing markets.
A key benchmark for interest rates across the economy, the 10-year yield settled at 4.258%, according to Tradeweb. That was up from 4.220% Tuesday and marked its highest close since June 2008, months before the collapse of Lehman Brothers and expansive Federal Reserve policy ushered in more than a decade of historically low bond yields.
The rise in yields is making investors nervous, because past surges have at times proved destabilizing for markets. With the 10-year yield still well below the level of short-term interest rates set by the Fed, some analysts see ample room for it to keep climbing—a development that could lead to unexpected disruptions, as investors are forced to unwind wagers based on projections for lower yields. (…)
The 10-year yield has been climbing for weeks based largely on a run of solid economic data, which has prompted many investors to abandon bets that the U.S. is headed toward a recession over the next six to 12 months. (…)
Longer-term yields got an extra boost this month when the Treasury Department announced that it would need to borrow more than anticipated in the coming months to finance the federal budget deficit. That is forcing investors to buy more bonds than they might have wanted. (…)
Instead of betting that the Fed will have to raise interest rates ever higher to defeat inflation and then start cutting them once a recession arrives, investors are wagering that the Fed may be done raising rates but also further away from any cuts.
That has helped drive up longer-term bond yields relative to shorter-term ones, in a reversal of the dominant trend over the past year-and-a-half. Minutes of the Fed’s most recent policy meeting released Wednesday afternoon added to recent signs that officials are growing more cautious about raising rates. (…)
The average rate on the standard 30-year fixed mortgage has climbed to 6.96%, up from about 5% a year ago. (…)
Let’s also not forget the impact of higher LT rates on banks’ bond portfolios…Risks of more bank crisis and less bank loans…
(…) Contributing to the selloff in the asset class, Japan — which has the developed world’s lowest interest rates thanks to its ultra-easy monetary policy — saw weak investor interest when selling 20-year notes Thursday.
The yield on a Bloomberg index for total returns on global sovereign debt rose to 3.3% Wednesday, the highest since August 2008. Sovereign bonds worldwide have handed investors a loss of 1.2% this year, making the asset class the worst performer across Bloomberg’s major debt indexes. (…)
The higher yields in the US continue to draw in buyers. Investors pumped $127 billion this year into funds that invest in Treasuries, on pace for a record year, Bank of America Corp. said last week, citing data from EPFR Global. (…)
JPMorgan Chase & Co.’s client survey showed long positions in the week to Aug. 14 matched the peak set in 2019, which was the highest since the financial crisis. (…)
China’s Housing Slump Is Much Worse Than Official Data Show
Bloomberg gathered several of its China reporters to sum up what’s really happening:
- Official prices showing new home prices off 2.6% and existing home prices off 6.0% reflect deficient surveys by government agencies. The reality, according to conversations with real estate agents and private data providers, show existing-home prices falling at least 15% in prime neighborhoods of major metropolitan areas like Shanghai and Shenzhen, as well as in more than half of China’s tier-2 and tier-3 cities. Existing homes near Alibaba Group Holding Ltd.’s headquarters in Hangzhou have dropped about 25% from late 2021 highs, according to local agents.
- Data from Goldman Sachs suggest that the huge overbuilding of recent years will take 5 years to clear.
- This excess supply is meeting with tepid demand: Chinese lack the cash and the confidence to commit to buy a house.
- Demographics have also turned negative with real demand (other than speculative) around 9 million units annually, down from 17 million 5 years ago.
If so, China, and the world for that matter given its importance, is not out of this growing mess anytime soon.
- China’s troubled shadow bank Zhongzhi plans to restructure its debt and sell assets to repay investors after hiring KPMG for an audit, people familiar said. Police visited some investors’ homes to urge them to avoid public protests.
- Global investors dump Chinese securities as state support hopes fade Reversal of flows reflects crumbling confidence in promises made by party leaders
Signs of late-summer COVID wave
If you’ve noticed a sudden rise in the number of people wearing masks while you’re out and about lately, here’s why: COVID is on the upswing again, Axios’ Alex Fitzpatrick and Kavya Beheraj report.
- The average COVID hospitalization rate nationwide rose about 17% between June and July, per the latest available CDC data.
- With so little testing happening these days compared to the height of the pandemic, hospitalization rates are now one of the best proxies for estimating broader viral spread.
