NEW YORK (ICIS) — Take Federal Reserve Chair Jerome Powell at his word — that the Fed will keep raising interest rates “until the job is done” to curb inflation.
The recent jumbo hike of 0.75pp at the September meeting was further evidence of that commitment – “ongoing increases… will be appropriate” – and more is likely to come.
The hike takes the federal funds rate to 3.00-3.25%. The median forecast by Fed members is now for interest rates to hit 4.40% by December.
The August consumer price index (CPI) was hot, gaining 0.1%m/m and 8.3%m/y, daunting hopes of a Fed pivot.
While gasoline prices fell sharply, groceries, electricity, natural gas and rents rose. Core CPI (excluding food and energy) rose 0.6% sequentially.
The release of the CPI on September 13th triggered a slump in both US stock and bond markets.
The deepening inversion of the Treasury yield curve (2-year Treasury yield higher than 10-year yield) added to recession fears as this has historically been a key leading indicator.
But consumer spending is holding up for now. US retail sales rose 0.3% mom and 9.1% year-on-year in August.
The labor market remains strong, wages continue to rise and the unemployment rate is a subdued 3.7%.
Despite a growing number of corporate layoffs being announced, some workers could see robust wage growth ahead. A tentative deal for rail workers includes a 24% pay rise over five years.
Production dynamics are weakening, but have yet to fully roll over. This is based on the US ISM Manufacturing Purchasing Managers Index (PMI) remaining in expansion territory (above 50) with the last August reading unchanged from July at 52.8.
The US stands out among the major economies as manufacturing PMIs in Europe and China shrink.
The US may be the cleanest shirt in a dirty hamper, but it’s not immune to global headwinds and rapidly rising interest rates. Cracks are showing at US chemical companies such as Eastman Chemical, Huntsman and Olin, which are warning of large profit shortfalls for Q3. Weak trends are likely to continue into the fourth quarter and 2023, and Wall Street analysts are busy trimming earnings forecasts.
Construction, one of the sectors hardest hit by higher interest rates, has been highlighted as a key area of weakness in chemical companies’ profit warnings.
US housing starts in August rose a better-than-expected 12.2% from July to 1.575 million units a year, down just 0.1% from a year earlier.
As mortgage rates recover and homebuilder confidence falls for a ninth straight month, housing starts could change direction again in September.
Building permits continued to decline, falling 10.0% to 1.517 million units, trailing permits by 14.4% year-on-year.
ICIS expects housing starts to fall from 1.59m in 2022 to 1.37m in 2023.
Light vehicle sales languished at low levels, with the August figure down 1.1% mom to 13.2 million. That was 0.7% more than a year ago. Year-to-date sales are down 15.2%.
While some expect pent-up demand and an easing of supply chain restrictions that will result in much higher sales in 2023, with higher auto loan rates and a less confident consumer, it’s going to be a tough one.
ICIS forecasts light vehicle sales to increase in 2023 from a low of 14.0m in 2022 to 15.4m in 2023 – still well below 2019’s level of 17.0m. Overall, ICIS expects that US GDP will fall from 5.7% in 2021 to 1.7% in 2022 and then just 0.5% in 2023.
The ICIS US Leading Business Barometer (LBB) fell to 123.3 in August, down 3.5% from the previous month and down 7.1% from its February peak.
As a rule of thumb, the barometer signals a US recession when it falls for three consecutive months and when the cumulative decline from a recent high is 3.0%.
LBB reached this threshold in July, and the signal became louder in August.
At your peril, ignore the Fed and leading indicators of recession like the LBB and the Treasury yield curve. The road to a soft landing for the US economy is getting narrower.
The chart below shows how the Federal Reserve’s interest rate projects rose in 2022.
