Trend watch and what’s new this week
Spring break activity continues to boost much of the activity-based data (slides 5 and 6). Hotel occupancy has jumped to 67.6%, the highest level since November. Weekly air passenger counts stayed above 16.5 million, the highest since the Christmas/New Years week of 2019, for the second straight week. Dining reservations have been especially strong in recent weeks, as the 7-day average soared to 129%, which is literally off the charts. We expect these strong trends will normalize in the next three weeks.
The Fed hiked by another quarter point
At its March rate-setting meeting, the Federal Reserve (Fed) increased its target range for the federal funds rate by a quarter point (0.25%) to a range of 4.75% to 5.00% (slide 7). With this week’s move, the Fed has pushed the target rate up 4.75% in the past year from essentially zero.
Uptick in housing data likely flash in the pan
The overwhelming amount of housing metrics have been weak for much of 2022. Yet, a couple of the recent indicators released this week were mixed. New homes sales (slide 8) rose for the third month in a row in February, while prices rose for the second time in three months.
On slide 9, existing home sales increased for the first time in a year. Prices also rose, snapping a seven-month slide. Although other data sources indicate that prices have softened in certain cities, overall prices have been supported by limited inventories of new and existing homes for sale.
We attribute the recent improvement in housing trends to the slide in mortgage rates nationally during the November to January period. Unfortunately, rates have surged in the past six weeks. Of course, higher rates and prices hurt housing affordability (slide 10).
U.S. surveys improve in March
On slide 11, the preliminary March readings for S&P Global's U.S. Purchasing Managers Index (PMI) indices for manufacturing and services both rebounded to multi-month highs, though manufacturing is still modestly contracting.
New orders for durable goods mixed, too
On slide 12, new orders for durable goods—big-ticket items such as equipment, machinery, electronics, and office furniture—fell 1.0% in February, although on a dollar basis it’s 24.6% above the December 2019 level. The weakness was largely confined to transportation, which fell 2.8%. But new orders for core capital goods, which excludes the volatile aircraft and defense components, rose 0.2%, just below the all-time high set in August 2022.
In the spirit of data dependence, the Fed’s actions followed inflation data. While the pace clearly peaked in 2022 and has cooled, inflation remains too hot for anyone’s comfort.
During the press conference following the Fed’s rate setting meeting, Fed Chair Powell threw cold water on the notion that the Fed will be cutting rates in 2023 as aggressively as markets had expected. Accordingly, stocks sold off. Meanwhile, yields fell, especially for shorter duration bonds.
Chair Powell also acknowledged that recent tightening of lending standards within the banking industry were like de facto rate hikes, essentially doing some of the work for them.
We maintain our view that Fed policy is being guided by scar tissue—from prematurely loosening policy in the past. More importantly, the Fed is hamstrung by inflation. Cutting rates to support the economy appears unlikely in the near term, especially with still-solid employment trends. While deeper rate cuts are plausible in the event of a sharper recession, we maintain our view that the coming economic slowdown will be relatively mild. Hence, we believe that the Fed rate tightening cycle is effectively over, though wouldn’t rule out that the Fed could do one more hike rate if inflation persists.
Nonetheless, the events of the past few weeks have changed our economic outlook for the coming months. The economic impact of the recent sharp interest rate gyrations and large swings in deposits—in search of either higher rates or safety—is less credit and less liquidity. That translates into less economic activity, otherwise known as a recession, which is likely being pulled forward.
The recent addition of tightening of credit conditions broadly is unwelcomed. A recession was already our base case due to dramatically higher interest rates. We also maintain our view that, while it has clearly peaked, elevated inflation remains public enemy number one and will dictate the Fed’s future actions.
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