Treasuries Are Responding

Japan Is Next

If a recession is going to arrive, it’s very likely going to be due to a major credit event or a housing market bust (or both). While the street is still talking itself into the idea that housing is propping up the economy despite high mortgage rates because home prices are still high, we’re seeing now that the latest housing data is starting to look bad. In October, new home sales badly missed their forecast and have largely stagnated over the past 6 months after soaring since the first half of 2022. This is particularly concerning since it’s new home construction that’s been driving the residential real estate boom all along. Existing home sales have been declining all year long and are now about 20% below their February peak. The median new home sales price is down 14% year-to-date and now sits at August 2021 levels. People have talked a lot about how well the housing market has been withstanding 7-8% mortgage rates. In reality, it’s just the lagged effect that is setting in now. Since most people’s wealth is tied up in their homes, this becomes a major issue likely within the next few months.

Treasuries are finally beginning to respond as if something is wrong. Up until as recently as the end of last week, long-term Treasury yield movements had mostly been a function of changes in Fed monetary policy expectations. After October’s new home sales report hit on Monday, long-term bond prices shot higher by more than 1.5% as stocks posted modest declines. It’s this kind of inverse correlation that indicates that Monday’s price action looked more like a flight to safety move than a Fed policy related move. Of course, we don’t want to overreact in one day’s market movements, but the fact that Treasuries reacted in the way they did suggests there’s a willingness to be the safe haven trade should conditions turn worse. Considering that housing data is likely to only get worse from here, don’t be surprised to see another significant leg higher in Treasuries soon.

The Black Friday through Cyber Monday shopping season for 2023 has wrapped up and it looks like the consumer has come through again. Black Friday sales were up about 7.5% over last year, while sales for the entire Thanksgiving weekend were up about 7.7%. Cyber Monday sales estimates are currently at around $12.4 billion, which would make it the busiest shopping day of all-time. Of course, there’s a catch to this. The use of “buy now, pay later” as a payment method was up 20% compared to last year. Translation: consumers continue to spend, which looks good at a high level, but they’re also struggling to find ways to pay for it. We know that outstanding credit card debt levels are already at record highs, soaring interest rates aren’t going to make things any cheaper and pesky inflation is still a problem. The markets may cheer the headline growth rates in sales over the past weekend, but it also highlights a bigger problem that isn’t going away.