As 2022 has developed we have found ourselves in a situation we have not seen for quite some time. Let me give you an example from the United States.
1 Year Treasury Rate is at 4.00%, compared to 3.95% the previous market day and 0.07% last year ( Y Charts)
The initial response is that it is quite some time since the US had a financial asset at 4% as we move to a new big figure. I note they point out this although of course how you define the long-term matters.
This is higher than the long term average of 2.85%.
Before we get to the consequences I hope that Vincent Deluard releases he has a one-year asset and a 15 year liability.
Just bought a 52-week T-bill at 4%
A year ago exactly, I refinanced my mortgage at 1.8%
After inflating the value of my home beyond my wildest dreams, the Fed & US Treasury are now paying off my mortgage.
Although to be fair a 1.8% mortgage was/is an excellent deal I think.
If we now look at the UK then our interest rate futures market ( used to be short sterling and is now SONIA) is predicting 4.46% in a years time. So we are back to a 4 big figure. In case you are wondering what the US equivalent is? It is nearly exactly the same.
So let us now shift to the economic impact of something we have not seen for a long time to which we can add the rate of change because if we go back to US Treasury Bills a move from 0.07% to 4% id quite something and it has happened in a year. Much of it more recently than that.
Recession?
The World Bank has taken a look at this.
Since the beginning of the year, a rapid deterioration of growth prospects, coupled with rising inflation and tightening financing conditions, has ignited a debate about the possibility of a global recession—a contraction in global per capita GDP.
They get quite close to my points in the past about us running a type of economic junkie culture.
To stem risks from persistently high inflation, and in a context of limited fiscal space, many countries are withdrawing monetary and fiscal support.
It has been a while.
As a result, the global economy is in
the midst of one of the most internationally synchronous episodes of monetary and fiscal policy tightening
of the past five decades……..This synchronous policy tightening contrasts with the policies adopted around the 1975 global recession but is similar to those implemented ahead of the 1982 recession.
For many I guess that is ancient history but I note a real problem in the next bit because of the fact that the central bankers dillied and dallied as they assured us that inflation would be “transitory”,
A major lesson from these two episodes is that making necessary policy adjustments in a timely fashion is essential to containing inflationary pressures and reducing the output costs of policy interventions.
So they failed that lesson.
Before I get to the World Bank view I find their idea of fiscal tightening rather curious as we in the UK are going to see fiscal loosening for energy bills and we have already noted efforts in Germany. I expect that to be true across much of Europe,at least.
Their scenario has something rather ominous.
Growth forecasts for the United States, euro area, and China have also been lowered significantly. These developments do not augur well for the likelihood
that a global recession can be avoided because there was significant weakness in global growth during the year preceding every global recession since 1970, which all occurred concurrently with a recession in the United States.
On a measure that has become used often the United States saw a recession at the beginning of 2022 as GDP fell in both the opening quarters. Also is this an official denial?
FRENCH CENTRAL BANK’S VILLEROY ON FRANCE: ANY RECESSION WILL BE LIMITED AND TEMPORARY, WITH A SHARP REBOUND IN 2024. ( @financialjuice )
Is that “limited and temporary” like he told us inflation would be? Apparently according to the French government growth is in fact rising.
“France is not going into a recession. France is having a good 2022. We have revised up our growth estimate to 2.7% from 2.5%,” Le Maire said. ( Reuters)
Back to the World Bank we see a conclusion that is a bit mealy-mouthed.
If the degree of global monetary policy tightening currently anticipated by markets is not enough to lower inflation to targets, experience from past global recessions suggests that the requisite additional tightening could give rise to significant financial stress and trigger a global recession in
2023.
They have a particular concern for the consequences of this as it relates to their particular area.
A global recession would also translate into a sharp decline in growth in EMDEs. In light of elevated vulnerabilities in many of these economies, they would face severe challenges associated with financial stress ( Emerging Market Developing Economies I think…)
Some had their own lost decade back then.
These crises were accompanied by a decade of lost growth in the Latin America and the Caribbean region. GDP per capita in the region recovered to its precrisis level only in 1993.
Housing Markets
I would add these to any analysis because from the point of view of central bankers they have helped drive what economic growth we have seen via “Wealth Effects”.
2 years ago: 30-yr mortgage rate was 2.87% & average new home price in the US was $405k.
Today: 30-yr mortgage rate is 6.02% & average new home price is $547k.
Result: $28k increase in down payment (assuming 20% down) and 96% increase in monthly payment (from $1,343 to $2,628). ( @charliebilello)
I think we can project what the economic impact of that will be as we note the change in post mortgage disposable income for new mortgage borrowers. If we go to The Globe and Mail we can take a look at Canada too.
The Bank of Canada’s housing affordability index, a measure of the share of disposable income of the average household that gets gobbled up by housing-related expenses such as mortgage payments and utility fees, surged to 48.2 per cent in the second quarter, the most recent figures show.
This has happened at much lower interest-rates than in the past.
That’s the steepest figure since the fourth quarter of 1990, when the Bank of Canada had hiked interest rates to more than 13 per cent to fight inflation and the housing bubble of the late 1980s began to pop.
The UK now has new mortgage rates of 4% or so.
So as Glenn Frey would say.
The heat is on, on the streetInside your head, on every beatAnd the beat’s so loud, deep insideThe pressure’s high, just to stay alive‘Cause the heat is on
Although it is moderated by the fact that more mortgages these days are of the fixed-rate variety so that will mean the impact is slower.
Comment
There are a lot of moving parts but let me remind you of a theme of my work which was highlighted in the UK earlier.
Retail sales volumes fell by 1.6% in August 2022……….in recent months, rising prices and cost of living are also affecting sales volumes.
It is kind of them to confirm my view that higher inflation is bad for Retail Sales and whilst these are UK specific numbers the move is a generic one that will be seen around much if not all of the world. So Retail Sales are in a recession and in some scenarios could see a depression.
Next up is that one-way of looking at these sort of moves in monetary policy in the past is of a brick attached to a rubber band. For a while you feel nothing and then it whacks you hard. The central bankers have exacerbated this by claiming inflation was “transitory” and now panicking. We know this because they call their actions “front-loaded”. For newer readers their words are often the opposite of reality.
The present situation is why in the past I argued we needed at increase in interest-rates to a zone around 1.5% to 2%. Partly a recalibration but also because it had been so long we do not have any clear idea of what the economic impact will be of rate rises. Instead they did nothing and are now suggesting interest-rates of 4% plus next year. On that road some areas will be looking at a depression rather than a recession.
Against that we are already seeing governments loosening fiscal policy and to my earlier list we can add France.
Asked to comment on government plans to allow a rise in gas and power prices for households in 2023 amid soaring energy prices, Le Maire reiterated it was “legitimate” that French households absorb a “small part” of the increased costs.
So the government will take the rest. Also as time passes as things deteriorate I expect the central bankers to panic and reverse course but at what point?
Does anyone know the way, did we hear someone say(We just haven’t got a clue what to do)Does anyone know the way, there’s got to be a wayTo blockbuster ( The Sweet)