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Federal Reserve Chairman Jerome Powell laid the groundwork on Wednesday for the central bank to slow its pace of monetary policy tightening as soon as December, all but solidifying the prospects that the Fed will raise interest rates half of a percentage point next month.
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Anyone watching the market knows stocks have been hammered since the Federal Reserve began in March what has turned into an aggressive series of interest rate hikes, but strategists at Deutsche Bank say they might be surprised to learn that those rate hikes probably aren’t the culprit.
The S&P 500
SPX,
has seen a return of negative 16.1%, at its current level, since the rate increases began. That’s the worst performance for an extended cycle of rate hikes since at least the late 1950s, according to a team led by Chief Strategist Binky Chadha in a Monday note (see chart below).
The chart highlights what may be a surprise to many investors: rate hike cycles, historically, haven’t been a negative for stocks. Of the 11 previous hiking cycles dating back to 1958-59, only two (1994-95 and 1973), produced negative returns. On average, rate-hike cycles have produced a 9% return for the S&P 500.
Any misconception that rate-hike cycles have tended to be negative for stocks was probably reinforced by the market’s ugly 2022 performance, but a closer look at the tape shows why that conclusion doesn’t hold up, Chadha and his team wrote:
In contrast to most historical rate hiking cycles, which saw a positive correlation between Fed rates and equities (median +61%; 8 of 10 positive), this cycle has seen it run strongly negative (-68%). This negative correlation naturally suggests higher rates lowered equities, reinforcing the widely held belief. A closer look though reveals that the S&P 500 has been at current levels 4 times over the last 5 months, while rates have been successively and notably higher each time, with the 2y yield up 175bps (basis points) from the first time. This contradicts the view that higher rates drove the S&P 500 selloff, or at least show that the last 175bps higher in rates have not lowered the S&P 500.
So if sharp interest rate rises aren’t the driver, what is behind the selloff?
The Deutsche Bank analysts suspect it’s more about volatility in the bond market, which has seen a sustained rise since the Fed began raising rates. That’s unusual, they said, with rates volatility typically spiking in the run-up to and around the initial Fed hike and around changes in the speed of hikes during the cycle, then quickly dissipating.
Treasury-yield volatility, as measured by the ICE BofA MOVE Index, hasn’t tended to rise in a sustained manner during rate-hike cycles, they wrote, with the one exception being the 1973 hiking cycle, which was the only one that also saw a significant stock-market selloff.
Indeed, when rates and rate volatility have diverged in the current cycle, the stock market has inversely tracked the move in volatility rather than the level of yields, the analysts noted. For examples, they pointed to June, when volatility rose and equities fell sharply while yields rose modestly; August, when yield volatility fell even as yields rose; and the recent stretch, which has seen equities rally alongside a decline in yield volatility while yields have been rangebound (see chart below).
“The selloff in equities during this rate hiking cycle has been driven, in our reading more by rising rates vol than it has by the higher level of rates, in what is a strong parallel with the only other rate hiking cycle (1973) that previously saw equities fall significantly,” the strategists wrote. “Vol” is market shorthand for volatility.
So the key question for investors is whether yield volatility will fall. Chadha and his team think it probably will, for two reasons: a slower and more “deliberate” speed of Fed hikes ahead; and the fact that rates have already seen a significant rise, pushing them closer to where they will peak, even if they will get there only gradually.
Volatility across asset classes tends to be highly correlated, they said, and paced by a common driver, which in this case has been the result of frequent changes in Fed guidance and the speed of rate hikes.
That means a decline in yield volatility should see a decline in stock-market volatility, with systematic strategists set to raise equity exposure from extremely low levels and indicating the market rally has further to go, they said.
Stocks were slightly lower in lackluster trade Tuesday, with the S&P 500 down 0.2%, while the Dow Jones Industrial Average
DJIA,
was off around 25 points, or 0.1%.
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Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.
REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
which represents 98% of U.S. companies by market capitalization.
We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust
VNO,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.
Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
| Company | Ticker | Dividend yield | Estimated 2023 AFFO yield | Estimated “headroom” | Market cap. ($mil) | Main concentration |
| Brandywine Realty Trust |
BDN, |
11.52% | 12.82% | 1.30% | $1,132 | Offices |
| Sabra Health Care REIT Inc. |
SBRA, |
9.70% | 12.04% | 2.34% | $2,857 | Health care |
| Medical Properties Trust Inc. |
MPW, |
9.18% | 11.46% | 2.29% | $7,559 | Health care |
| SL Green Realty Corp. |
SLG, |
9.16% | 10.43% | 1.28% | $2,619 | Offices |
| Hudson Pacific Properties Inc. |
HPP, |
9.12% | 12.69% | 3.57% | $1,546 | Offices |
| Omega Healthcare Investors Inc. |
OHI, |
9.05% | 10.13% | 1.08% | $6,936 | Health care |
| Global Medical REIT Inc. |
GMRE, |
8.75% | 10.59% | 1.84% | $629 | Health care |
| Uniti Group Inc. |
UNIT, |
8.30% | 25.00% | 16.70% | $1,715 | Communications infrastructure |
| EPR Properties |
EPR, |
8.19% | 12.24% | 4.05% | $3,023 | Leisure properties |
| CTO Realty Growth Inc. |
CTO, |
7.51% | 9.34% | 1.83% | $381 | Retail |
| Highwoods Properties Inc. |
HIW, |
6.95% | 8.82% | 1.86% | $3,025 | Offices |
| National Health Investors Inc. |
NHI, |
6.75% | 8.32% | 1.57% | $2,313 | Senior housing |
| Douglas Emmett Inc. |
DEI, |
6.74% | 10.30% | 3.55% | $2,920 | Offices |
| Outfront Media Inc. |
OUT, |
6.68% | 11.74% | 5.06% | $2,950 | Billboards |
| Spirit Realty Capital Inc. |
SRC, |
6.62% | 9.07% | 2.45% | $5,595 | Retail |
| Broadstone Net Lease Inc. |
BNL, |
6.61% | 8.70% | 2.08% | $2,879 | Industial |
| Armada Hoffler Properties Inc. |
AHH, |
6.38% | 7.78% | 1.41% | $807 | Offices |
| Innovative Industrial Properties Inc. |
IIPR, |
6.24% | 7.53% | 1.29% | $3,226 | Health care |
| Simon Property Group Inc. |
SPG, |
6.22% | 9.55% | 3.33% | $37,847 | Retail |
| LTC Properties Inc. |
LTC, |
5.99% | 7.60% | 1.60% | $1,541 | Senior housing |
| Source: FactSet | ||||||
Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
| Company | Ticker | Dividend yield | Estimated 2023 AFFO yield | Estimated “headroom” | Market cap. ($mil) | Main concentration |
| Prologis Inc. |
PLD, |
2.84% | 4.36% | 1.52% | $102,886 | Warehouses and logistics |
| American Tower Corp. |
AMT, |
2.66% | 4.82% | 2.16% | $99,593 | Communications infrastructure |
| Equinix Inc. |
EQIX, |
1.87% | 4.79% | 2.91% | $61,317 | Data centers |
| Crown Castle Inc. |
CCI, |
4.55% | 5.42% | 0.86% | $59,553 | Wireless Infrastructure |
| Public Storage |
PSA, |
2.77% | 5.35% | 2.57% | $50,680 | Self-storage |
| Realty Income Corp. |
O, |
4.82% | 6.46% | 1.64% | $38,720 | Retail |
| Simon Property Group Inc. |
SPG, |
6.22% | 9.55% | 3.33% | $37,847 | Retail |
| VICI Properties Inc. |
VICI, |
4.69% | 6.21% | 1.52% | $32,013 | Leisure properties |
| SBA Communications Corp. Class A |
SBAC, |
0.97% | 4.33% | 3.36% | $31,662 | Communications infrastructure |
| Welltower Inc. |
WELL, |
3.66% | 4.76% | 1.10% | $31,489 | Health care |
| Digital Realty Trust Inc. |
DLR, |
4.54% | 6.18% | 1.64% | $30,903 | Data centers |
| Alexandria Real Estate Equities Inc. |
ARE, |
3.17% | 4.87% | 1.70% | $24,451 | Offices |
| AvalonBay Communities Inc. |
AVB, |
3.78% | 5.69% | 1.90% | $23,513 | Multifamily residential |
| Equity Residential |
EQR, |
4.02% | 5.36% | 1.34% | $23,503 | Multifamily residential |
| Extra Space Storage Inc. |
EXR, |
3.93% | 5.83% | 1.90% | $20,430 | Self-storage |
| Invitation Homes Inc. |
INVH, |
2.84% | 5.12% | 2.28% | $18,948 | Single-family residental |
| Mid-America Apartment Communities Inc. |
MAA, |
3.16% | 5.18% | 2.02% | $18,260 | Multifamily residential |
| Ventas Inc. |
VTR, |
4.07% | 5.95% | 1.88% | $17,660 | Senior housing |
| Sun Communities Inc. |
SUI, |
2.51% | 4.81% | 2.30% | $17,346 | Multifamily residential |
| Source: FactSet | ||||||
Simon Property Group Inc.
SPG,
is the only REIT to make both lists.
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U.S. stocks tumbled on Monday as protests in China raised the risks to global growth and Federal Reserve policy makers said more interest-rate increases are needed to control inflation.
U.S. stocks had notched weekly gains last week for the second time in three weeks. The Dow rose 1.8%, the S&P 500 advanced 1.5% and the Nasdaq gained 0.7%.
Wall Street started the week in a downbeat mood as traders absorbed the impact of unrest in China and assessed interest-rate commentary by a pair of Fed officials on Monday.
St. Louis Fed President James Bullard told MarketWatch that he favors more aggressive interest-rate hikes to contain inflation, and that the central bank will likely need to keep interest rates above 5% into 2024. Meanwhile, his colleague John Williams, president of the New York Fed, said that U.S. unemployment could climb to as high as 5% next year, versus October’s rate of 3.7%, in response to the central bank’s series of rate hikes.
Overseas, Hong Kong’s Hang Seng Index
HSI,
closed down by 1.6% and most equity indexes across Asia also fell, with the exception of India’s, on concerns about unrest in China. Those concerns also spilled over into commodity markets, where West Texas Intermediate crude for January delivery
CLF23,
briefly fell to less than $74 per barrel before recovering and settling at $77.24 a barrel on the New York Mercantile Exchange. Meanwhile, copper prices HG00 were off 0.9% at $3.594 per pound.
“What people are worried about is the potential for protests in China to spread and whether the population is reaching its breaking point,” said Derek Tang, an economist at Monetary Policy Analytics in Washington. “At the same time, Fed speak is ramping up and the message is there’s more hikes to come. So investors aren’t finding relief.”
Signs that economic activity in China will continue to be disrupted by the protests or by additional anti-COVID measures will likely continue to weigh on commodity prices, analysts said. Meanwhile, concerns about global growth helped to support government bond markets earlier on Monday, when the yield on the 10-year note
TMUBMUSD10Y,
briefly traded at its lowest level since October.
The unprecedented waves of protest in China “have caused ripples of unease across financial markets, as worries mount about repercussions for the world’s second-largest economy,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “As demonstrations spread across the country from Beijing to Xinjiang and Shanghai, reflecting rising anger about the zero-Covid policy, a sustained recovery in demand across the vast country appears even further away.”
But the news wasn’t all bad: Reports of strong online Black Friday sales helped boost shares of Amazon.com Inc.
AMZN,
which were up 0.6%.
Investors can expect more information about the health of the U.S. economy in what’s shaping up to be a busy week for U.S. economic data: Later this week, investors will receive the ADP employment report followed by the November jobs report. Revised data on third-quarter gross domestic product is due on Wednesday, along with the Fed’s Beige Book report. Federal Reserve chair Jerome Powell is set to speak publicly on Wednesday, and a closely watched gauge of inflation is due on Thursday.
Read: ‘We see major stock markets plunging 25% from levels somewhat above today’s,’ Deutsche Bank says
— Jamie Chisholm contributed to this article.
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President Joe Biden and Secretary of Education Miguel Cardona.
The Washington Post | The Washington Post | Getty Images
It’s been almost three years since people with federal student loans have had to make a payment on their debt, and the Biden administration recently announced that borrowers have even more time.
In March 2020, when the coronavirus pandemic first hit the U.S. and crippled the economy, the U.S. Department of Education suspended federal student loan payments and the accrual of any interest, providing borrowers extra breathing room during an especially hard financial period.
Resuming the bills for more than 40 million Americans has proven to be a massive and tricky task, and the holiday on the payments has now spanned two presidencies and been extended eight times.
Even before the public health crisis, when the U.S. economy was enjoying one of its healthiest periods in history, problems plagued the federal student loan system, with about 25% — or more than 10 million borrowers — in delinquency or default.
Experts say hardship rates are likely to only increase with the setbacks of the pandemic, the current sharp rise in prices on everyday goods and the fact that borrowers have gotten used to a budget sans student loans.
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White House officials had hoped to ease the transition back into life with student loan payments by first forgiving a large swath of the debt.
Yet not long after President Joe Biden announced his plan to cancel up to $20,000 in student loans for millions of Americans, a number of conservative groups and Republican-backed states attacked the policy in the courts. Two of these lawsuits have been successful in at least temporarily halting the relief, and the Education Department closed its loan cancellation application portal this month.
With so much still up in the air, the Biden administration has pushed back the due date on student loan bills again.
“It would be deeply unfair to ask borrowers to pay a debt that they wouldn’t have to pay, were it not for the baseless lawsuits brought by Republican officials and special interests,” Education Secretary Miguel Cardona said in a statement.
Here’s what borrowers need to know about getting more time.
It’s a little complicated.
With previous extensions of the payment pause, the Education Department provided one date for when student loan bills would resume.
This time, it left things a little more open-ended, saying that the bills will restart only 60 days after the litigation over its student loan forgiveness plan resolves and it’s able to start wiping out the debt.
Therefore, the soonest the bills could become due again would be late January, if the legal challenges clear up by the end of November, although that’s unlikely.
If the Biden administration is still defending its policy in the courts by the end of June or if it’s unable to move forward with forgiving student debt by then, it said, the payments will pick up at the end of August.
So borrowers have at least two more months without the bills and at most nine.
The U.S. government has extraordinary collection powers on federal debts and it can seize borrowers’ tax refunds, wages and Social Security checks if they fall behind on their student loans.
During the extended payment pause, however, the Education Department is also ceasing all collection activity, it said.
Borrowers in default on their student loans should also look into the recently announced “Fresh Start” initiative, in which they’ll have the opportunity to return to a current status.
Higher education expert Mark Kantrowitz had previously recommended that, despite the chance of picking up a lower interest rate, federal student loan borrowers should refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.
Now that borrowers know how much in loan cancellation is coming — assuming the president’s policy survives in the courts — borrowers may want to consider the option now, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender now than later.
Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.
It would be deeply unfair to ask borrowers to pay a debt that they wouldn’t have to pay, were it not for the baseless lawsuits brought by Republican officials and special interests.
Miguel Cardona
Secretary of the U.S. Department of Education
He said those include borrowers who don’t qualify for Biden’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the Biden administration plans to cancel. Those borrowers may want to look at refinancing the portion of their debt over the relief amounts, Kantrowitz said.
Betsy Mayotte, president of The Institute of Student Loan Advisors, warned borrowers to first understand the federal protections they’re giving up before they refinance.
For example, the Education Department allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.
“Refinancing can generate a lower interest rate than federal student loan rates,” Mayotte said. “But your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option.”
Boy_anupong | Moment | Getty Images
With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to salt away the money you’d usually put toward your student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. You’ll just want to make sure any account you put your savings in is FDIC-insured, meaning up to $250,000 of your deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say. The average interest rate on credit cards is currently more than 19%.
If you have a healthy rainy-day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break.
With interest temporarily suspended, any payments will go directly toward your debt’s principal, potentially shortening your repayment timeline, said Anna Helhoski, a student loan expert at NerdWallet.com.
“You could continue making payments each month by contacting your servicer, or save the money and make a lump sum payment on your highest-interest loan before interest accrues again when repayment restarts,” Helhoski said.
There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.
That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.
One more possibility: If you find yourself in a financially comfortable position and it doesn’t make sense for you to continue paying down your student loans, you may want to donate the extra cash.
You can make sure an organization is reputable using tools such as the Better Business Bureau’s Wise Giving Alliance or Charity Navigator, Helhoski said. If the charity is registered as a 501(c)(3), you’ll even be eligible for a tax break.
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New York
CNN Business
—
Americans are getting ready for food, family and football on Thursday, but investors were still holding off until Wednesday afternoon before starting to give thanks.
That’s because the Federal Reserve released the minutes from its latest meeting at 2pm ET Wednesday, which provided more clues about the central bank’s thinking on inflation and interest rate hikes.
At its November 2 meeting the Fed raised rates by three-quarters of a percentage point — its fourth straight hike of such a large magnitude. But Fed chair Jerome Powell suggested at a press conference that the Fed may soon begin to slow the pace of hikes.
The minutes from that meeting showed that several other Fed policymakers agreed with Powell’s assessment.
“A number of participants observed that, as monetary policy approached a stance that was sufficiently restrictive to achieve the Committee’s goals, it would become appropriate to slow the pace of increase in the target range for the federal funds rate,” the Fed said in the minutes.
The Fed added that “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.”
Stocks, which were relatively flat and meandering before the minutes came out, popped after their release. The Dow ended the day up more than 95 points, or 0.3%. The S&P 500 jumped 0.6% and the Nasdaq rose 1%.
Other Fed members, most notably vice chair Lael Brainard, had also hinted n recent speeches at a slower pace of hikes. Yet there have been confusing signals from other Fed officials, who have continued to stress that inflation isn’t going away and must be brought under control.
To that end, the Fed said in the minutes that inflation remains “stubbornly high” and “more persistent than anticipated.”
With that in mind, traders are now pricing in a more than 75% chance that the Fed will raise rates by only a half-point at its December 14 meeting, according to futures contracts on the CME. That’s up from odds of 52% for a half-point hike a month ago, but lower than an 85% likelihood of a half-point increase that was priced in just last week.
A recent batch of inflation reports seem to suggest that the pace of runaway price increases is finally starting to slow to more manageable levels. The job market remains relatively healthy as well, although the most recent jobless claims figures ticked up from a week ago.
But as long as the labor market remains firm and inflation pressures continue to ebb, the Fed will likely pull back on the magnitude of its rate hikes.
Some experts are growing concerned that if the Fed goes too far with rates, the increases could eventually slow the economy too much and potentially lead to much higher unemployment, job losses and even a recession.
The Fed’s rate hikes have had a clear impact on the housing market, with surging mortgage rates helping to put a dent into home sales.
Still, Wall Street is growing more confident that the Fed might be able to pull off a so-called soft landing. The Dow soared 14% in October, its best month since January 1976. The Dow is up another 4.5% in November and is now only down 6% this year.
The S&P 500 and Nasdaq also have rebounded significantly since October, but both of those broader market indexes remain down more sharply for the year than the Dow.
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Senior officials at the Federal Reserve expect smaller increases in interest rates will “soon be appropriate” as the threat of recession grows.
Although the Fed still expects rates to rise higher than previously forecast, senior officials are unsure just how much further they will go. Slower rate hikes, they say, would give them more time to evaluate the “lagging” effects on the economy amid the rising threat of a recession.
“Short of some wild inflation report before the next meeting, 50 basis points sounds very reasonable in December. But the Fed is clearly not finished yet.”
The Fed’s economic staff for the first time said a recession was possible in the next year, according to a detailed summary of the bank’s last strategy session in early November.
The bank’s previous minutes have not mentioned the possibility of a recession.
The main U.S. stock gauges
SPX,
DJIA,
extended gains after the release of the Fed minutes.
The Fed has quickly raised a key U.S. interest rate to a top range of 4% from near zero last spring in an effort to tame high inflation. Rising rates tend to reduce inflation by slowing the economy and depressing demand for goods and labor.
Yet some economists and senior officials at the Fed also worry the central bank could spark a recession or a period of prolonged economic weakness if rates go too high.
Some members said there was an increasing risk that the Fed’s actions “would exceed what was required” to bring inflation down to acceptable levels.
In recent speeches, a few have suggested a “pause” in rate hikes might be warranted by early next year to see how they affect the economy. A rapid easing of inflationary pressures could strengthen their case.
The rate of inflation exploded earlier this year to a 40-year high of 9.1% from almost zero during the early stages of the pandemic. It has since slowed to 7.7%.
Earlier this month, the bank lifted the so-called fed funds rate by three-quarters of a point to a range of 3.75% to 4% — the third big rate increase in a row. Most U..S. loans such as mortgages and car loans are tied to the fed fund rate.
In December, the Fed is likely to raise rates again, but markets are betting on a smaller 1/2-point increase. The minutes also suggest a smaller rate hike is likely.
“Short of some wild inflation report before the next meeting, 50 bps sounds very reasonable in December,” senior economist Jennifer Lee of BMO Capital Markets said. “But the Fed is clearly not finished yet.”
Senior Fed officials have repeatedly said they plan is to further raise rates in 2023 and then keep them high for an unspecified period of time to make sure inflation declines.
Officials are less unified on just how high rates will go. Some want to stop at around 5% while others suggest they might need to go higher.
Wall Street expects the Fed to raise its benchmark rate to 5% by next year.
The Fed’s aggressive posture stems from the biggest surge in prices since the early 1980s.
The Fed is aiming to bring down inflation to pre-pandemic levels of 2% or so, but they acknowledge it could take a while.
Several Fed members also expressed worries that non-traditional financial institutions could amplify the problems for the U.S. economy if higher rates exposed them to greater instability.
The troubles at the crypto-currency firm FTX were emerging just as the Fed meeting took place.
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Minneapolis
CNN Business
—
Heading into the all-important holiday shopping season, American consumers still aren’t feeling very confident about the state of the US economy.
The University of Michigan’s consumer sentiment index landed at 56.8 in November, up from the preliminary reading of 54.7 measured earlier this month but lower than the 59.9 recorded in October.
Economists were expecting a reading of 55, according to consensus estimates on Refinitiv.
The month-over-month decline in sentiment offset about one-third of the gains made since the index bottomed out in June, according to Joanne Hsu, director of the university’s Surveys of Consumers.
“Headwinds to consumer strength have started to emerge. Strong incomes have thus far helped consumers, particularly lower-wage workers, cope with high inflation,” Hsu said in a statement. “However, their perceptions of weakening labor markets could make them pull back their spending in the future. Wealthier households are experiencing declining stock markets and home values, which would also produce drag on their willingness to spend.”
Consumers surveyed also highlighted the effects of rising interest rates on their desire to buy homes, cars and other big-ticket items. The Federal Reserve, in efforts to combat decades-high inflation, has enacted a series of steep interest rate hikes.
About 83% of respondents to the University of Michigan’s Surveys of Consumers said that it was a bad time to buy a home. That’s the highest share ever recorded, according to the university.
The survey also showed that consumers’ inflation expectations for this year and five years out remained relatively unchanged at 4.9% and 3%, respectively. This is a key data point for the Federal Reserve. If consumers believe prices will remain high, that could factor into increased wage demands, which could cause businesses to raise prices.
Earlier this month, when the preliminary survey data was released, Hsu noted that very few consumers were front-loading purchases to avoid higher interest rates in the future. That was an indication that expectations aren’t worsening, she stated at the time.
Still, Hsu noted Wednesday, uncertainty over these expectations remains at an elevated level, “indicating that the general stability of these expectations may not necessarily endure.”
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Mortgage applications rose 2.2% last week compared with the previous week, prompted by a slight decline in interest rates, according to the Mortgage Bankers Association’s seasonally adjusted index.
Refinance applications, which are usually most sensitive to weekly rate moves, rose 2% for the week but were still 86% lower than the same week one year ago. Even with interest rates now back from their recent high of 7.16% a month ago, there are precious few who can still benefit from a refinance — just 220,000, according to real estate data firm Black Knight.
Mortgage applications to purchase a home rose 3% for the week, but they were down 41% from a year ago. Some potential buyers may now be venturing back in, hearing that there is less competition and more negotiating power, but there is still a shortage of homes for sale and prices have not come down significantly.
A home, available for sale, is shown on August 12, 2021 in Houston, Texas.
Brandon Bell | Getty Images
Rates are still twice what they were at the beginning of the year, but they eased somewhat last week. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 6.67% from 6.90%, with points increasing to 0.68 from 0.56 (including the origination fee) for loans with a 20% down payment.
“The decrease in mortgage rates should improve the purchasing power of prospective homebuyers, who have been largely sidelined as mortgage rates have more than doubled in the past year,” Joel Kan, an MBA economist, said in a release. “With the decline in rates, the ARM share [adjustable-rate] of applications also decreased to 8.8% of loans last week, down from the range of 10% and 12% during the past two months.”
Mortgage rates haven’t moved at all this week, as the upcoming Thanksgiving holiday tends to weigh on volumes.
“It’s not that things aren’t moving. They just aren’t moving like normal,” said Matthew Graham, chief operating officer at Mortgage News Daily. “Expect things to get back closer to normal next week, but for the market to continue to wait until December 13 and 14 for the biggest moves.”
That’s when the government releases its next major report on inflation and the Federal Reserve announces its next move on interest rates.
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It’s no secret that it’s a tough market for prospective home buyers.
In October, U.S. buyers needed to earn $107,281 to afford the median monthly mortgage payment of $2,682 for a “typical home,” Redfin reported this week.
That’s 45.6% higher than the $73,668 yearly income needed to cover the median mortgage payment 12 months ago, the report finds.
The primary reason is rising mortgage interest rates, said Melissa Cohn, regional vice president at William Raveis Mortgage. “The bottom line is mortgage rates have more than doubled since the beginning of the year,” she said.
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Despite the sharp drop reported this week, the average interest rate for a 30-year fixed-rate mortgage of $647,200 or less was hovering below 7%, compared to under 3.50% at the beginning of January.
And while home values have softened in some markets, the average sales price is up from one year ago.
“Home prices have gone up substantially, mortgage rates have more than doubled and that’s just crushing affordability,” said Keith Gumbinger, vice president of mortgage website HSH.
Meanwhile, a higher cost of living is still cutting into Americans’ budgets, with annual inflation at 7.7% in October.
While the current conditions may feel bleak for buyers, experts say there are a few ways to reduce your monthly mortgage payment.
For example, a higher down payment means a smaller mortgage and lower monthly payments, Gumbinger explained. “More down in this sort of environment can definitely play a role in getting your mortgage cost under control,” he said.
Another option is an adjustable-rate mortgage, or ARM, which offers a lower initial interest rate compared to a fixed-rate mortgage. The rate later adjusts at a predetermined intervals to the market rate at that time.
An ARM may also be worth considering, as long as you understand the risks, Cohn said.
If you’re planning to stay in the home for several years, there’s a risk you won’t be able to refinance to a fixed-rate mortgage before the ARM adjusts, she said. And in a rising rate environment, it’s likely to adjust higher.
Your eligibility for a future refinance can change if your income declines or your home value drops. “That’s a greater risk, especially for a first-time homebuyer,” Cohn said.
Of course, home values and demand vary by location, which affects affordability, Gumbinger said. “Being patient and being opportunistic is a good strategy for market conditions like this,” he said.
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New York
CNN Business
—
Investors sleuthing for clues about what the Federal Reserve will decide during its December policy meeting got quite a few this week. But those hints about the future of monetary policy point to an outcome they won’t be very happy about.
What’s happening: Federal Reserve officials made a series of speeches this week indicating that aggressive interest rate hikes to fight inflation would continue, souring investors’ hopes for a forthcoming central bank policy shift. On Thursday, St. Louis Federal Reserve President James Bullard said the central bank still has a lot of work to do before it brings inflation under control, sending the S&P 500 down more than 1% in early trading. It later pared losses.
Bullard, a voting member on the rate-setting Federal Open Market Committee (FOMC), said that the moves the Fed has made so far to fight inflation haven’t been sufficient. “To attain a sufficiently restrictive level, the policy rate will need to be increased further,” he said.
Those comments come a day after Kansas City Fed President Esther George, a voting member of the FOMC, said to The Wall Street Journal that she’s “looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there.”
San Francisco Fed President Mary Daly added on Wednesday that a pause in rate hikes was “off the table.”
A numbers game: Fed officials should increase interest rates to somewhere between 5% and 7% to tamp inflation, Bullard said Thursday. Those numbers shocked investors, as they would require a series of significant and economically painful hikes which increase the chance of a hard landing.
The current interest rate sits between 3.75% and 4% and the median FOMC participant projected a peak funds rate of 4.5-4.75% in September. If those numbers hold steady, Fed members would only raise rates by another three-quarters of a percentage point.
But Fed Chair Powell said at the November meeting that the projections are likely to rise in December and if Bullard is correct, that means investors can expect another one to three percentage points in rate hikes.
Dreams of a pivot: October’s softer-than-expected CPI and producer price reading bolstered investors’ hopes that the Fed might ease its aggressive rate hikes and sent markets soaring to their best day since 2020 last week.
But messaging from Fed officials this week has brought Wall Street back down to earth.
That’s because market rallies help to expand the economy, said Liz Ann Sonders, Managing Director and Chief Investment Strategist at Charles Schwab, which is the opposite of what the Fed is trying to do with its tightening policy. Fed officials could be attempting to do some “jawboning” via excessively hawkish speeches in order to bring markets down, she said.
The bottom line: Investors listen closely to Bullard’s comments because he’s known for having looser lips than other Fed officials, Peter Boockvar, chief investment officer of Bleakley Financial Group, wrote in a note Thursday. But his hawkish predictions may have been “overboard,” especially since he won’t be a voting member of the FOMC next year.
Still, Wall Street analysts are listening. Goldman Sachs raised its peak fed funds rate forecast on Thursday to 5-5.25%, up from 4.75-5%.
A series of high-profile layoffs have rattled Big Tech this month.
Amazon confirmed that layoffs had begun at the company and would continue into next year, just days after multiple outlets reported the e-commerce giant planned to cut around 10,000 employees. Facebook-parent Meta recently announced 11,000 job cuts, the largest in the company’s history. Twitter also announced widespread job cuts after Elon Musk bought the company for $44 billion.
The series of high-profile layoff announcements prompted fears that the labor market was weakening and that a recession could be around the corner.
Those fears aren’t unwarranted: The Federal Reserve is actively working to slow economic growth and tighten financial conditions to rebalance the white-hot labor market. Further layoffs in both tech and other industries are likely inevitable as the Fed continues to raise interest rates.
But this wave of layoffs isn’t as significant as headlines might lead Americans to believe. Thursday’s weekly jobless claims actually fell by 4,000 to 222,000 in spite of the surge in tech job cuts.
In a note on Thursday Goldman Sachs analysts outlined three reasons why the layoffs may not point to a looming recession in the US.
First off, the tech industry accounts for a small share of aggregate employment in the US. While information technology companies account for 26% of the S&P 500 market cap, it accounts for less than 0.3% of total employment.
Second, tech job openings remain well above their pre-pandemic level, so laid-off tech workers should have good chances of finding new jobs.
Finally, tech worker layoffs have frequently spiked in the past without a corresponding increase in total layoffs and have not historically been a leading indicator of broader labor market deterioration, Goldman analysts found.
“The main problem in the labor market is still that labor demand is too strong, not too weak,” they concluded.
Mortgage rates dropped sharply last week following a series of economic reports that indicated inflation may finally be easing, reports my colleague Anna Bahney
The 30-year fixed-rate mortgage averaged 6.61% in the week ending November 17, down from 7.08% the week before, according to Freddie Mac, the largest weekly drop since 1981.
But that’s still significantly higher than a year ago when the 30-year fixed rate stood at 3.10%.
“While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”
Affording a home remains a challenge for many home buyers. Mortgage rates are expected to remain volatile for the rest of the year. And prices remain elevated in many areas, especially where there is a very limited inventory of available homes for sale.
Meanwhile, inflation and rising interest rates mean many would-be buyers are also facing tightened budgets.
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London
CNN Business
—
The last time a British finance minister revealed tax and spending plans, markets went haywire and the country’s prime minister ultimately lost her job. The new government is not looking for a repeat performance.
On Thursday, Chancellor Jeremy Hunt is due to unveil a budget that will aim to restore confidence in the United Kingdom’s ability to manage its public finances. But that may be easier said than done.
The country is staring down the barrel of a grueling recession, and investors remain on edge as interest rates rise. That requires Hunt, who has acknowledged that Britain faces “extremely difficult” decisions, to pull off a delicate balancing act.
Media reports indicate that the government is looking to come up with between £50 billion ($59 billion) and £60 billion ($70 billion) through a mix of tax increases and spending cuts, many of which may not take effect until after the next election in 2024.
“If you do too much, too soon, you risk worsening the recession,” said Ben Zaranko, a senior research economist at the Institute for Fiscal Studies. “If you delay everything until after the next election, you risk not being seen as credible.”
A new wave of austerity could help restore the government’s reputation with financial markets after the budget from former Prime Minister Liz Truss — which featured an unorthodox combination of major tax cuts and ramped-up borrowing — unleashed panic.
But it will do little to ease fears about the country’s grim economic prospects. The United Kingdom is one of two G7 economies to have contracted in the third quarter. It’s now smaller than it was before the coronavirus pandemic. The Bank of England is forecasting a lengthy recession, which could stretch into 2024.
New cuts could make matters worse. When the government adopted an austerity program in 2010 on the heels of the Great Recession, it shaved 1% off the country’s GDP, according to the UK budget watchdog. Just four years ago, former Prime Minister Theresa May pledged to bring nearly a decade of austerity to a close.
Now, tax rises could further depress consumer confidence — already near a record low — and spending cuts risk placing further strain on public services that are already buckling under enormous pressure.
Still, Hunt intends to show he has a plan to reduce government debt as a proportion of GDP in the medium-term. It currently stands at 98%. The Office for Budget Responsibility said in July that it could reach nearly 320% in 50 years.
“We do have to do some tax rises, do some spending cuts, if we’re going to show we’re a country that pays our way,” Hunt told Sky News on Sunday.
How did the United Kingdom get here? There’s no shortage of finger pointing.
Part of the problem is global in nature. Interest rates have risen rapidly around the world as central banks attempt to rein in inflation. That’s pushed up borrowing costs for the government, dealing a shock after years in which money was cheap.
At the same time, skyrocketing energy costs, exacerbated by Russia’s war in Ukraine, have compelled governments to step in to cushion the blow of crippling energy bills — shortly after they spent significant sums helping households and businesses through the pandemic.
Hunt has scrapped plans to cap energy bills for typical households at £2,500 ($2,981) for the next two years. Instead, support will only be guaranteed until next spring. But the measures will still prove costly.
The government can’t blame all its problems on the rest of the world, however.
“You can just look at how the UK is performing relative to every other country in Europe, and it’s obvious there’s a UK-specific element to this,” Zaranko said.
The United Kingdom’s exit from the European Union has weighed on trade and contributed to shortages of workers in key industries.
“The UK economy as a whole has been permanently damaged by Brexit,” former Bank of England official Michael Saunders told Bloomberg TV this week. “If we hadn’t had Brexit, we probably wouldn’t be talking about an austerity budget this week. The need for tax rises, spending cuts wouldn’t be there.”
And while inflation in the United States cooled more than expected in October, falling to 7.7%, it’s still rising sharply in the United Kingdom, reaching a 41-year high of 11.1% last month.
That’s bolstering expectations that the Bank of England will need to keep raising interest rates and could hold them higher for longer, though recession may complicate those forecasts.
The country’s labor market also remains extremely tight, with an employment rate lower than before the coronavirus hit and a record number of people who aren’t working due to long-term illness.
“The UK does stand out in that labor supply has been very constrained, perhaps more so than in other countries,” said Ruth Gregory, senior UK economist at Capital Economics.
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Minneapolis
CNN Business
—
A key measure of inflation, wholesale prices, rose by 8% in October from a year before, according to the latest report from the Bureau of Labor Statistics.
While still historically high, it was the smallest increase since July of last year and significantly better than forecasts. It’s the second inflation report this month to show signs of cooling in the rising prices that have plagued the economy.
Economists expected the Producer Price Index, which measures prices paid for goods and services before they reach consumers, to show an annual increase of 8.3%, down from September’s revised 8.4%.
On a monthly basis, producer prices rose 0.2%, below expectations and even with the revised 0.2% increase seen in September.
Year-over-year, core PPI — which excludes food and energy, components whose pricing is more prone to market volatility — measured 6.7%, down from September’s revised annual increase of 7.1%.
Month-over-month, core PPI prices were flat, the lowest monthly reading since November 2020. In September, core PPI increased by a revised 0.2% from the month before.
Economists had expected annual and monthly core PPI to measure 7.2% and 0.3%, respectively, according to estimates on Refinitiv.
President Joe Biden heralded October’s PPI report Tuesday calling it “more good news for our economy this morning, and more indications that we are starting to see inflation moderate.”
“Today’s news – that prices paid by businesses moderated last month – comes a week after news that prices paid by consumers have also moderated,” Biden wrote Tuesday. “And, today’s report also showed that food inflation slowed – a welcome sign for family’s grocery bills as we head into the holidays.”
For much of this year, the Federal Reserve has sought to tamp down decades-high inflation by tightening monetary policy, including issuing an unprecedented four consecutive rate hikes of 75 basis points, or three-quarters of a percentage point.
The better-than-expected PPI data reflects an economy that has slowed, with supply moving more into balance, said Jeffrey Roach, chief economist for LPL Financial.
Costs associated with transportation and warehousing, for example, declined for the fourth consecutive month, a likely result of the improved global shipping climate, he said. Producer costs for new cars fell the most since May 2017, he added.
“Barring geopolitical or financial crises, inflation should continue its deceleration into 2023,” he said in a statement.
Since PPI captures price changes happening further upstream, the report is considered by some to be a leading indicator for broader inflationary trends and a predictor of what consumers will eventually see at the store level.
“The PPI read certainly adds more fuel to the fire for those who feel we may finally be on a downward inflation trend,” Mike Loewengart, Morgan Stanley’s head of model portfolio construction, said in a statement.
Last week’s Consumer Price Index showed inflation slowed to 7.7% from 8.2% year-over-year for consumer goods, surprising investors and giving Wall Street its biggest boost since 2020.
The CPI data was “reassuring,” Fed vice chair Lael Brainard said on Monday, signaling that the rate hikes appear to be taking hold, and if the economic data continues to show inflation on the decline, then the central bank could scale back the extent of its future rate hikes.
“When you look at the inflation numbers, there’s some evidence that we’ve peaked, but are we coming down quickly?” Steven Ricchiuto, chief economist for Mizuho Americas told CNN Business.
Ricchiuto noted that the October figures are only a couple steps lower than what was seen in September.
“These aren’t the types of things that tell the Fed to stop tightening rates,” he said. However, “they may tell you [that] you don’t need 75 basis points.”
CNN’s DJ Judd and Matt Egan contributed to this report.
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Economists are predicting that soaring interest rates and falling prices will mark the end of the U.K.’s 13-year housing market boom, potentially leading to a house price crash.
Matt Cardy | Getty Images News | Getty Images
LONDON — The U.K. property market may be verging on a major downturn, with some market watchers warning of a collapse in prices of up to 30% as data points to the biggest slump in demand since the Global Financial Crisis.
New homebuyer enquiries plunged in October to their lowest level since the 2008 financial crash, excluding the period during the first Covid-19 lockdown, the latest RICS housing surveyors report showed last week.
Meantime, the MSCI UK Quarterly Property Index, which tracks retail, office, industrial and residential property, slumped 4.3% in the three months to September, marking the sector’s worst performance since 2009.
The market slowdown marks a reprieve from a two-year, pandemic-induced home buying frenzy, with property transactions in September down 32% annually from a 2021 peak.
But as the era of cheap money fades, and the Bank of England doubles down on inflation-busting rate hikes to counter the chaotic mini-budget, economists say the downturn could be more acute than first thought.
Although a house price correction is widely expected … it appears to be unfolding faster than anticipated.
Kallum Pickering
senior economist, Berenberg
“Although a house price correction is widely expected as part of the ongoing recession, it appears to be unfolding faster than anticipated,” Kallum Pickering, senior economist at Berenberg, wrote of the U.K. market Thursday.
The investment bank now sees U.K. property prices declining by around 10% by the second quarter of 2023. But some lenders are less sanguine.
Nationwide, one of the U.K.’s largest mortgage providers, said earlier this month that house prices could collapse by up to 30% in its worst-case scenario. Meanwhile, the gloomiest of 2023 estimates from banks Lloyds and Barclays point to drop-offs of almost 18% to over 22%, respectively.
Indeed, prices have already begun falling in some places, according to property search site Rightmove, which said Monday that sellers cut prices by 1.1% in October, taking the average price of a newly-marketed home to £366,999 ($431,000).
The U.K. is not alone. Rising interest rates, soaring inflation and the economic shock from Russia’s war in Ukraine have weighed heavy on the global housing market.
Recent analysis by Oxford Economics showed property prices look set to fall in nine of 18 advanced economies, with Australia, Canada, the Netherlands and New Zealand among the markets most at risk of declines of up to 15%-20%.
“This is the most worrying housing market outlook since 2007-2008, with markets poised between the prospect of modest declines and much steeper ones,” Adam Slater, lead economist at Oxford Economics, wrote last month.
Housing surveyors have reported the largest fall in new buyer inquiries in October since the financial crisis, excluding the period during the Covid-19 lockdowns.
Isabel Infantes | Afp | Getty Images
But the U.K.’s unique economic landscape puts it at higher risk of mortgage delinquencies, according to Goldman Sachs. Factors at play include Britain’s worsening economic picture, the sensitivity of default rates to downturns, and the shorter duration of U.K. mortgages relative to euro zone and U.S. peers.
“Looking across countries, we see a relatively greater risk of a meaningful rise in mortgage delinquency rates in the U.K.,” Yulia Zhestkova, an economist at the bank, wrote in a report last week.
Meantime, rising unemployment risks — a historic barometer of delinquency rates — add to pressure on the U.K., which Goldman Sachs said is “already in recession.”
The U.K. economy contracted 0.2% in the third quarter of 2022, latest GDP figures showed Friday. A further consecutive quarter of decline in the three months to December would indicate that the U.K. is in a technical recession.
The Bank of England warned earlier this month that the U.K. now faces its longest recession since records began a century ago, with the downturn expected to last well into 2024.
If unemployment were to rise sharply, the dangers to housing markets would be amplified considerably.
Adam Slater
lead economist, Oxford Economics
Describing the outlook as “very challenging,” the central bank said unemployment would likely double to 6.5% during the two-year slump, affecting around 500,000 jobs.
Such a spike in unemployment could “considerably” raise the risks for the housing market by potentially creating a wave of forced sales and foreclosures, Oxford Economics warned in its report. Indeed, according to Goldman Sachs’ analysis, for every one percentage point increase in the U.K. unemployment rate, mortgage delinquency tends to rise by over 20 basis points after one year.
“If unemployment were to rise sharply, the dangers to housing markets would be amplified considerably,” Slater said.
Still, much of the outlook will hinge on the government’s upcoming fiscal statement Thursday, when Finance Minister Jeremy Hunt is expected to unveil £60 billion ($69 billion) of tax hikes and spending cuts set to weigh heavy on growth.
Some strategists have said Hunt could delay much of the savings until after the next election — due no later than January 2025 — in a bid to shield the economy during the height of recession. However, Hunt has been candid in warning of “eye-watering” decisions ahead.
The Bank of England, for its part, has insisted that it will continue to raise rates, albeit to a potentially lower peak.
Yet even with little let-up expected for the housing market in the near-term, economists say the risks of a shock reverberating across the wider financial market are minimal.
Greater regulation and adequate capitalization of the banking sector following the financial crisis have limited exposure to risky mortgages. Meanwhile, the majority of housing debt sits with households with reasonable savings buffers, Berenberg’s Pickering said.
“We see limited risk that the unfolding housing market correction will morph into another financial crisis,” he added.
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Federal Reserve Gov. Christopher Waller said Sunday that financial markets seem to have overreacted to the softer-than-expected October consumer price inflation data last week.
“It was just one data point,” Waller said, in a conversation in Sydney, Australia, sponsored by UBS.
“The market seems to have gotten way out in front over this one CPI report. Everybody should just take a deep breath, calm down. We’ve got a ways to go ” Waller said.
Investors cheered the soft CPI print, released Thursday, driving stocks up to their best week since June. The S&P 500 index
SPX,
closed 5.9% higher for the week.
The data showed that the yearly rate of consumer inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation had peaked at a nearly 41-year high of 9.1% in June.
Waller said it was good there was some evidence that inflation was coming down, but noted that there were other times over the past year where it looked like inflation was turning lower.
“We’re going to see a continued run of this kind of behavior and inflation slowly starting to come down, before we really start thinking about taking our foot off the brakes here,” Waller said.
“We’ve got a long, long way to go to get inflation down. Rates are going keep going up and they are going to stay high for awhile until we see this inflation get down closer to our target,” he added.
The Fed is focused on how high rates need to get to bring inflation down, and that will depend solely on inflation, he said.
Waller said “the worst thing” the Fed could do was stop raising rates only to have inflation explode.
The 7.7% inflation rate seen in October “is enormous,” he added.
The Fed signaled at its last meeting earlier this month that it might slow down the pace of its rate hikes in coming meetings.
The central bank has boosted rates by almost 400 basis points since March, including four straight 0.75-percentage-point hikes that had been almost unheard of prior to this year.
“We’re looking at moving in paces of potentially 50 [basis points] at the next meeting or the next meeting after that,” Waller said.
The Fed will hold its next meeting on Dec. 13-14, and then again on Jan. 31-Feb. 1.
At the same time, Powell said the Fed was likely to raise rates above the 4.5%-4.75% terminal rate that they had previously expected.
“The signal was ‘quit paying attention to the pace and start paying attention to where the endpoint is going to be,’” Waller said.
In the wake of the CPI report, investors who trade fed funds futures contracts see the Fed’s terminal rate at 5%-5.25% next spring and then quickly falling back to 4.25%-4.5% by November. That’s well below the levels prior to the CPI data.
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John Lovallo, UBS senior research analyst, joins ‘Power Lunch’ to discuss if mortgage rates could fall below five percent at this time next year, which homebuilders would benefit most and what price would entice first-time homebuyers.
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A for sale sign sits in front of a house on Circle Avenue in Charlotte, N.C., Friday, Nov. 4, 2022.
alslitz@charlotteobserver.com
Interest rates have been the talk of the real estate world recently, with mortgage rates rising to levels not seen in years as white-hot markets try to cool.
Higher rates across the board mean more expensive mortgages for folks looking to buy a home, but the market isn’t the only thing that influences interest rates. Your individual financial situation, especially your credit score, impacts the rate you’ll be offered by lenders when you apply for a mortgage.
Here’s what to know about credit scores and interest rates on mortgages, and how to improve your own chances of getting the best rates available:
Regardless of whether interest rates on mortgages are going up or down, your credit score impacts the rate you’ll get from lenders. Even small differences in rates can make a big difference in what you’ll ultimately pay over the life of your mortgage.
Use the graph below to see what your credit score would get you in today’s market (Note: This graphic will update as rates fluctuate):
If you’re thinking about buying a home in the future, there are steps you can take to improve your credit score before applying for a mortgage. The mortgage lender Fannie Mae recommends:
Using credit cards “in moderation” and maintaining a low balance on them
Paying your bills on time
Not opening an excessive amount of credit cards
Avoiding closing credit cards and therefore impacting “the total amount of credit you have available and how much you have used”
Avoiding opening a new credit card or making a big purchase “within six months before trying to buy a home”
This story was originally published November 11, 2022 1:26 PM.
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U.K. businesses are bracing for a difficult winter amid soaring inflation and higher energy bills.
Andrew Matthews – Pa Images | Pa Images | Getty Images
LONDON — The doors to The 25, a Torquay-based boutique bed and breakfast on the U.K.’s southwest coast, are now closed for the winter period. But this season, they will remain shut for longer than usual.
With rising energy bills and higher costs piling pressure on U.K. businesses, owner Andy Banner-Price has deferred reopening by a month until well into the spring.
And while forward bookings from regular guests remain strong, new enquiries are down 50% and bookings 15% lower than previous years, painting an uncertain outlook for the year ahead.
“I suspect many people are having a wait and see approach as there is so much uncertainty in the economy at present,” Banner-Price told CNBC.
Many (businesses) are aiming to get the Christmas rush over, and then close the doors in January.
Tina McKenzie
chair of policy and advocacy, Federation of Small Businesses
“It’s a cumulative effect of bad news every time you turn the TV on or open a newspaper,” he said.
“I think we talk ourselves into recession sometimes,” he continued. “Negative growth will just make some people even more worried about their jobs and wary of spending money.”
The Bank of England warned last week that the U.K. is now headed for its longest recession since records began a century ago.
Data Friday showed that the economy contracted by 0.2% in the third quarter of this year — likely marking the start of an official recession (defined as two straight quarters of negative growth).
The central bank expects GDP (gross domestic product) to continue falling through 2023 and into the first half of 2024. The projected two-year downturn is set to be “very challenging,” the Bank said, costing around 500,000 jobs, and piling the pressure on already pinched businesses and households.
A woman walks past rundown, shuttered shops in Romford, England.
John Keeble | Getty Images News | Getty Images
Tina McKenzie, chair of policy and advocacy at the Federation of Small Businesses, said many small and medium-sized U.K. businesses are now “under attack from various sides,” citing reduced access to cash and labor, as well as inflationary pressures.
U.K. consumer inflation hit a 40-year high of 10.1% in September, while the producer input prices remained stubbornly high at 20%. The BOE has warned that interest rates, currently set at 3%, will now likely have to rise further than previously predicted to push inflation back toward its 2% target.
Still, the worst effects of a forthcoming downturn may not become apparent until the first or second quarter of 2023, McKenzie said. In the meantime, many businesses — particularly those in the hospitality and retail sectors — are just biding their time.
“Businesses are under a huge amount of pressure. Many are aiming to get the Christmas rush over, and then close the doors in January,” McKenzie told CNBC via zoom call.
More than a third (35%) of the U.K.’s hospitality sector say they are at risk of closure early next year due to higher costs, soaring energy bills and weakened consumer spending, according to a survey of operators released last week.
“It’s stark and frightening,” said David Holliday, co-founder of Norfolk, England-based brewer Moon Gazer Ale, which supplies ales and craft lager to pubs across the country.
The Bank of England has warned that the U.K. is facing its longest recession since records began a century ago.
Huw Fairclough | Getty Images News | Getty Images
Until now, Holliday said his business has been “taking the hit” and absorbing increased production and energy costs to buffer customers. But if by the spring those price rises look set to continue, he’ll have to pass on those costs.
“We’ve been sharing the pain with our customers, but that’s not going to be sustainable in six to 12 months’ time,” Holliday said. This year alone, he estimates that Moon Gazer Ale’s energy bills have risen by £25,000-£30,000 ($29,000-$35,000) as costs in Europe have surged following Russia’s invasion of Ukraine.
A percentage of the industry will say, for me, there is no next.
David Holliday
co-founder, Moon Gazer Ale
For many, however, a further surge in costs could be the death knell in a “three-year uphill struggle” for an industry already maimed by Covid-19 restrictions, staff shortages and inflationary pressures.
“They’re kind of running out of fight,” Holliday said. “A percentage of the industry will say, for me, there is no next.”
Businesses owners will now be looking ahead to the U.K.’s much-anticipated Nov. 17 Autumn Statement, during which Finance Minister Jeremy Hunt is expected to outline £60 billion ($69 billion) of spending cuts and tax hikes to plug the hole in the country’s battered public finances.
But many worry that the Treasury could go too far in its attempts to recover the U.K.’s economic standing — damaged as it was by Liz Truss’ chaotic mini-budget — that it would spell further trouble for struggling industries and stymy economic growth going forward.
“Because of Liz Truss and Kwasi Kwarteng, they went the other extreme and they’re in such a cautious mode,” said McKenzie.
Early drafts of the government’s plan contain up to £35 billion of spending cuts and around £25 billion of tax rises, according to the Guardian. That as the BOE’s Chief Economist Huw Pill warned Monday that extensive tax rises and spending cuts could put Britain at risk of a deeper than expected “economic slowdown.”
The U.K. Treasury said it would not comment on “speculation around tax changes” when contacted by CNBC.
“Our fear is they’re going to go so extreme to please investors. And if they don’t do anything to protect the most vulnerable, then they won’t get the growth,” McKenzie said, citing improved migration policies and a VAT rate reduction as potential areas in which the government could offer support.
And while some business owners like Banner-Price are confident they will pull through as consumers scale back to fewer but more quality experiences and products, his fortunes and those of many others will depend on the wider business community’s ability to weather the storm.
“Even if we survive well, our guests still need to visit thriving local restaurants, cafes, tourist attractions etc. They still need to be able to shop and visit the theatre, catch a taxi and use all the other small businesses,” Banner-Price said.
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