Weekly Surveillance Note

WEEK OF: 07/22/2022

Summary Views

· Lots of housing data this week pointing to a softening real estate market as higher home prices and higher mortgage rates impacts demand

o The CEO of the National Association of Home Builders said that the data points to a recession in the housing market

· Early data from the Philly Fed Survey and Flash PMIs also point to deterioration in services and manufacturing activity

· Revise down growth in Q3, inflation remain unchanged, and rate outlook remains unchanged

Our Takeaway

· While the data points to weaker activity, it’s very hard to say if and when the US economy will enter into a legitimate recession (vs. a technical one). The reason for this is that while surveys of sentiment, housing, and business activity remain muted or are in outright decline, consumer spending is still robust. However, a strong dollar, higher interest rates, and high inflation level are headwinds for the economy that we will continue to monitor.

· Data this week does not change the balance of risk going into next week. We expect the Federal Reserve to raise interest rates another 75bp and to limit forward guidance given the volatile nature of inflation.

o Without a recession, we don’t see a clear path to lower inflation in the next 6-months, which suggests additional hikes may be warranted

o Our initial view was that back-to-back 75bp hikes would pull forward easing – and this is still our view, and the market too has adjusted to reflect potential easing by the end of this year

· Equity strategy through the week will depend on the performance of major tech companies such as MSFT, GOOGL, TXN, ADP, META, QCOM, AAPL, and others. Our view is positive on software capex spend, primarily within the enterprise and infrastructure space. We see headwinds for semiconductors and consumer businesses, with the risk of a collapse in orders high for tech hardware due to the bull-whip effect.

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Weekly Tracker

· 07/18/2022 – NAHB’s Homebuilder Sentiment came in at 55 vs. 65 expected, reflecting a persistent weakness in the outlook for the housing market

o "Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home," said NAHB Chairman Jerry Konter.

· 07/19/2022 – Building Permits and Housing Starts in the United States fell to two-year lows driven by a decline in single-family housing

· 07/20/222 – MBA Mortgage Applications fell 6.3%, down for the third week with the average 30-year fixed rate at 5.82% -- mortgage rates are at the highest levels since the 2000s housing boom

· 07/20/2022 – Existing Home Sales fell 5.4%, continuing their steep decline since the beginning of the year

· 07/21/2022 – Philadelphia Fed Business Outlook came in at the lowest since 1979, down 12.3% -- this survey is important because it is a leading indicator of the PMI survey’s and other measures of economic activity (and it is the first data point in a month for manufacturing activity)

· 07/21/2022 – Initial Jobless Claims came in higher than expected at 251k vs. survey of 240k, hinting at some weakness in employment (but should not be so surprising given the recent headlines of Tech layoffs – though how much those impacted this number is unclear)

· 07/22/2022 – Flash PMI came in mixed with services in contraction with a 47.5 print, while manufacturing fared better at 52.3 (Flash PMI is the early release that captures about 80%+ of the PMI survey)

Note About Surveillance

· We rely on a variety of sources to build a Bayesian understanding of forecasts and the future which helps us respond more dynamically to changing economic conditions.

· We cover 8 countries (United States, China, Japan, United Kingdom, Australia, Brazil, Turkey, and Indonesia) and 1 region (Eurozone) which represents ~ 70% of global GDP[1].

· Unless otherwise noted, data is sourced from Bloomberg.

[1] As of World Bank estimates in FY 2020

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