In Ernest Hemingway’s novel The Sun Also Rises, one of the main characters described how he went bankrupt: “Two ways. Gradually, then suddenly.” Below is the stunning growth in US Federal debt since the end of WW2.
The US is expected to have a deficit of 7.1% of GDP next year - 3x the average of major global economies. This is the key reason why we still think there will be rate cuts this year - inflationary fiscal policy (ginormous deficit spending) will offset the Fed’s ability to bring inflation down to the Fed’s target and budgetary pressures on debt service and solvency pressures on the banking sector’s CRE holdings will encourage the Fed to bring rates down even without reaching the target. And we expect this result no matter who wins since both candidates believe in inflationary deficit spending.
Powell says the data do not support rate cuts. Chair Jerome Powell: – "The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence." It is always advantageous for governments with large debts to operate with higher inflation - effectively it allows them to repay the debt with nominally less valuable dollars.
Fed Funds Futures Curves
The total outstanding commercial mortgages set to mature by year-end surged from $658 billion to $929 billion from the beginning of last year to mid-March.
Nearly half of non-bank loan maturities from 2023 were pushed into 2024.
The increasing delinquency rates in the office market will have a particularly harsh impact on the banking sector as a whole, and regional commercial banks in particular. This is because they hold over 65% of the CRE loans.
A recent study by the National Bureau of Economic Research suggests that as many as 385 American banks could fail solely due to commercial real estate loans. These would mainly be small regional banks, which typically allocate a third of their assets to commercial real estate loans.
According to a report from the American Banker, five banks in the US together hold half a trillion dollars in CRE loans. Almost a year ago, Credit Suisse, a major global bank with $540 billion in assets, failed and was merged with UBS. In the US, Silicon Valley Bank, Signature Bank, and First Republic Bank also collapsed around the same time. These were the second, third, and fourth biggest bank resolutions since the Great Depression. Authorities managed to avoid deeper financial turmoil last year, but taxpayers were again burdened with significant public support to protect more than just insured depositors.
On to better news. It looks we are now in the period we projected last year that would feel like but not actually be a recession. The Atlanta Fed’s GDPNow estimate for Q1 GDP growth jumped after the retail sales surprise.
Here is the Oxford Economics’ GDP tracker.
Following the robust retail sales report, Treasury yields and the US dollar rose further. Robust US consumption may sustain elevated inflation levels. Remember, the 30-year mortgage is 96% correlated to the 10-year Treasury.
The return of more prime-age women into the labor force has extended the expansion of the US labor force.
The US increasingly relies on immigrants to grow its labor force.
Residential construction activity dipped below last year’s levels.
These charts employ dual y-axes to highlight the recent divergence between single-family and multifamily seasonally-adjusted housing trends.
Homeowners’ insurance costs have increased rapidly in recent years, exacerbating housing affordability woes
Here is the rate lock count.
The number of housing units authorized but not yet started remains high, particularly in the multifamily sector
Single family backlog remains constant, multifamily is growing.
Here is the regional breakdown (seasonally adjusted) of existnig home sales
Builders are increasingly constructing single-family homes intended for rental purposes.
Population projections for the 6 largest countries
