The Looming Credit Event
The Housing Market, Manufacturing Decline, And Consumer Struggles To Come
It’s tough for me to see what came out of this past week’s Fed meeting and not think that there’s some kind of ulterior motive at play. Powell said inflationary conditions were moderating enough to warrant a pause in rate hikes (the markets largely expected this), but updated its Dot Plot report to indicate that the central banks expect two more rate hikes yet to come (the market didn’t quite see this one coming). Perhaps more egregious is the idea that none of the FOMC members expect to see a recession in 2023, 2024 or 2025, according to the Summary of Economic Projections. Zero. Nobody. In fact, the lowest GDP forecast for 2023 was growth of 0.5%. Does the Fed actually think that GDP growth will remain positive enough throughout that it can hike two more times without consequence to kill inflation once and for all? I don’t want to sound too conspiratorial, but maybe the Fed is acknowledging that the fastest way to kill inflation is via recession and perhaps that’s what they’re indirectly aiming for? Regardless, there are far too many signals and risks already present to make it pretty clear that recession is a very distinct possibility, if not probability, at this point. The fact that no one in the FOMC sees a recession happening is both confusing and overly optimistic.
The bulls sure still seem to think everything is fine and dandy. Tech stocks roared higher as did the broader market and, while small-caps were comparative laggards, investors were more than comfortable shaking off any concerns about higher rates as long as the Fed felt that recession could be avoided. The idea of a resilient U.S. economy is certainly a fair one given the confluence of data we’ve got in hand already, but the direction of the housing market, the weakness in manufacturing and the struggles of the consumer are all risks that shouldn’t be ignored, not to mention the possibility of a credit event occurring in the 2nd half of this year.
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