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Let's dive into the intriguing world of economics, where it sometimes feels like (and let's be fair, this is the case) central bankers are orchestrating a grand performance while just taking us along for the ride.
Chair Jerome Powell of the Federal Reserve seems to be making all the right moves, as inflation takes a step back and the economy holds its ground. With the annual Jackson Hole meeting on the horizon, Powell might be looking forward to a bit of a breather.
As the minutes from the July interest-rate meeting hit the newsstands this Wednesday, the big picture remains solid: things seem to be coming along quite well.
A glance beyond the US borders paints a different picture though. Over in the UK, they're grappling with quicker inflation, which has triggered record wage growth.
But the core inflation numbers are still dangerously high, forcing the Bank of England to gear up for more interest rate hikes.
Meanwhile, the euro zone is cautiously nudging its rates higher, even with a somewhat fragile economy, with the Netherlands officially entering a recession on the 16th of August.
Japan, on the other hand, is riding a wave of strong growth, but their central bank hasn't really gotten around to raising interest rates.
They're still on the fence about whether they've escaped the clutches of the deflation that's been haunting them for three decades.
And then there's China, facing a tough time. This week, they tried to boost confidence with interest rate cuts, but it seems like it didn't quite hit the mark with investors.
Rising Mortgage Rates
Shifting gears a bit, let's talk about a storm brewing in the mortgage market. If you're a homeowner looking to move or refinance, you might be in for a surprise.
And as we're well aware, the American economy heavily relies on its real estate and mortgage sectors to maintain stability, especially in times like these.
Average mortgage rates are making a jump past 7%, the highest they've been in two decades. That's a sharp rise from the cozy 5% we were enjoying just a year ago, according to data from Freddie Mac's crystal ball.
Now, here's the kicker—a lot of this stems from what's going on with government bonds. US Treasuries are like the bedrock of the whole global financial show, maybe even more critical than the short-term fed-funds rate.
These bonds set the standard for a ton of financial products, including mortgages, because they're seen as the safest way to lend money.
After all, Uncle Sam is known for settling his debts, isn't he? Well, that is, as long as there's no political spectacle akin to the debt-ceiling showdown we witnessed earlier this year. However, it's worth noting that the resolution of that particular drama was merely deferred, with the potential for lingering tension in the future.
Here's a plot twist: while the Federal Reserve has been on a bit of a rate-raising spree, taking them from rock-bottom to over 5% since March 2022, the yields on 10-year Treasury bonds didn't exactly follow suit.
They went from around 2% to just about 4%. But now, they've pushed past that 4% mark, hitting levels we haven't seen since 2007, and they're still climbing.
Now, this isn't just because folks are suddenly scared of inflation. Inflation tends to give bonds the cold shoulder because it eats into the profits lenders get.
Rather, the bond market is slowly warming up to the idea that the Fed might not have as much room to cut rates as they hoped, once they've got this inflation surge under control. (This is part of the reason why the yield curve has been flipped on its head for more than a year.)
Believe it or not, the optimism about the economy is what's actually nudging mortgage rates higher. So, in a strange twist, it's the good news that's putting pressure on those mortgage rates.
Is the Recession still Lurking?
Now, let's talk about some shadows that are casting doubt over our economic scene.
You might have heard whispers about a possible recession, and they're not entirely unfounded.
Here's the scoop: historically, there's been a pattern where GDP growth turns negative about 15 months after the yield curve inverts.
And guess what? The yield curve inverted in August 2022, which means we're now about 3 months away from that possible and historically recurring downturn (see image 1 below).
But hold on a sec.
Our job market is showing some muscle—it hasn't wavered. The only other time we saw this was back in 1962, and guess what? No recession followed that downturn in yield curve (see image 2 below).
This indicates that there's a chance we're similarly avoiding a negative downturn in GDP growth & therefore a recession.
So, what gives?
Well, this strong job market vibe amid yield curve inversion is a good argument for a softer landing this time around. But here's the kicker—we're not out of the woods yet.
Typically, the unemployment rate shift happens around 14 months after the yield curve throws its curveball. And right now, we're only 12 months into our current inversion.
Ultimately, the future remains a bit foggy, but we've got a blend of history and insight to help us navigate these uncharted waters.
