{"id":50573,"date":"2023-08-19T17:34:43","date_gmt":"2023-08-19T21:34:43","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/why-interest-rates-will-soon-be-falling\/"},"modified":"2023-08-19T17:34:46","modified_gmt":"2023-08-19T21:34:46","slug":"why-interest-rates-will-soon-be-falling","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=50573","title":{"rendered":"Why Interest Rates Will Soon Be Falling"},"content":{"rendered":"
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Over the past several months, this blog has emphasized that the war on inflation has been won. In measurement terms, the \u201cgo to\u201d index for the public and the Fed is the CPI (Consumer Price Index), and the crucial monthly number is the 12-month look-back, i.e., the rate of inflation as measured over the past year (+3.3% as of July). The three-month and six-month trends aren\u2019t ever discussed (the three-month trend is +1.9% annual rate; the six-month is 2.6%). In addition, as we have emphasized in these blogs, BLS\u2019s imputation of shelter costs (30% weight in the CPI) uses data that is lagged 8-12 months. If current data were used, CPI would already be significantly under the Fed\u2019s CPI 2% target.<\/p>\n

Markets are finally coming around to this viewpoint. The graph at the top shows that the Fed\u2019s rhetoric has the market believing that the current Fed Funds rate (5.25%-5.50%) will be with us for the rest of the calendar year, but you can see that there is some relief in 2024. This is from the point of view of a market sold on a \u201csoft-landing.\u201d If Recession were the base case, the downtrend in rates would be much faster.<\/p>\n

Recession!<\/h2>\n

Our view is, and has been, that a Recession is coming, if not already here. And, we are not alone. Despite the fact that the official forecast of the Fed is that there will be \u201cNo Recession\u201d (Powell planted a question in his last press conference to make sure he was asked about the change in the Fed\u2019s GDP forecast), the economists at three of the Regional Federal Reserve Banks (NY, Cleveland, St. Louis) think otherwise. The chart above shows that the probability of Recession for each of the Banks is actually higher than those same models showed for the last two actual Recessions (the Pandemic Recession and the Great Recession). In fact, a Recession has never failed to appear when the models were at today\u2019s levels.<\/p>\n

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In addition, for the 16th<\/sup> month in row, the Conference Board\u2019s Leading Economic Indicators (LEI) have been negative. The last positive reading was way back in February 2022! At this many negative months in a row, LEI has a 100% track record in forecasting Recession.<\/p>\n

Two more indicators screaming Recession are shown in the chart below. The freight industry is clearly in Recession, with the Cass Freight Index down -2.2% in July alone and -8.9% over the year. One of the major freight haulers, Yellow, recently closed its doors and declared bankruptcy. If goods aren\u2019t moving, commerce must be on the wane!<\/p>\n

Housing is another sector in the doldrums. Mortgage loan applications continue to fall every week and are now at 30-year lows (-29.4% year over year). Both new and existing home sales show significant year over year declines, and building permits are off -13% from year earlier levels (not a good omen for the immediate future).<\/p>\n

But, you say, retail sales for July were +0.7%, a huge upside surprise. Doesn\u2019t that show economic expansion? Not so fast. Like some of the other suspicious seasonally adjusted (SA) data, a look beneath the cover tells a different story. As pointed out by Rosenberg Research, the actual raw (Not Seasonally Adjusted (NSA)) data for retail sales fell -0.4% from June to July; this on top of June\u2019s -2.7% monthly decline. Rosenberg says that this was the weakest set of June and July data in five years. Over that time period, he says, the NSA data have averaged +0.8%, so this -0.4% is a very weak reading. Backing up that view, the Johnson Redbook Same Store Sales for July showed 0% growth.<\/p>\n

Once again, as we have found in other recent reports, it appears that the magic of seasonal adjustment has turned a sow\u2019s ear into a silk purse! While markets accept seasonally adjusted numbers as gospel, we are clearly skeptical.<\/p>\n

Other Data<\/h2>\n