Is the downturn in housing a surefire indicator that the US economy is already in recession?

Outlook: This is going to be horrendous week and likely either super-volatile or eerily calm and flat. We get the Fed rate decision on Wednesday, and the next day brings the BoJ, Swiss National Bank and the Bank of England. In addition, Sweden may well hike again tomorrow and Norway is expected to raise rates on Thursday.

Should we assume the everyone has already positioned for the decisions? One interesting curiosity is whether the BoJ intervenes when it makes it clear the rate cap is not being changed–or it’s changed a little, which would confuse the hell out of everyone.

Tagging along behind central bank decisions (and comments) are inflation rates for Japan and Canada, the latest IFO from Germany, US housing data, and far too many flash PMI’s from US, UK, eurozone, Australia and Japan. We can expect plenty of noise about the US housing data, starting with the NAHB September housing market index today, August housing starts and permits tomorrow and existing home sales ahead of the Fed announcement on Wednesday.

Several analysts claim the downturn in housing is a surefire indicator the US economy is already in recession. That’s not how it works, especially in the US, where 90% are 30-year fixed-rate (Freddie Mac). Mortgage rates exceeded 6% last week for the first time since 2008, but this time we don’t have those toxic MBS’s to bring everything crashing down, so it’s an irrelevant comparison.

In Europe and elsewhere, mortgages are usually shorter-term and/or floating-rate, and so the effect of central bank hikes is more widely felt. The don’t even have 30-year fixed-rate mortgages in some places, including Australia. So don’t expect the Fed to mention housing on Wednesday, as the RBA did recently (and it meets next on Oct 4).

We expect the Fed to raise rates by 75 bp. The BoE is expected to do 50 bp but may surprise with 75. The SNB is being difficult and refuses to hint at whether it will follow the ECB and/or continue hiking after the June surprise of 50 bp but leaving Switzerland as the only European country with a negative rate (-0.25%). SNB chief Jordan suggested the bank would be data-driven, including by the price of oil, and sure enough, the latest reading is 3.5% in August after 3.4% in July. Does that push the SNB to hike by 25 bp to bring the rate to zero? A lot depends on how the SNB sees such a move affecting the Swiss franc, and on the SNB preferring to keep everyone guessing. In other words, 25 bp seems likely but nobody knows. One source expects the SNB to hike by 50 bp and another says 75 bp . Note that the EUR/CHF channel in the Chart Package is dead flat (and the USD/CHF sell signal looks dead wrong).

Meanwhile, the weird firmness in the euro is attributed to ECB VP de Guindos saying the pending slowdown (aka recession) will not cure inflation by itself and rates will have to be raised again to prevent people getting the inflation mentality and causing self-fulfilling inflation prophecies.

In the end, futures point to the US Fed funds rate at 4.4% in Q1 (from 2.25-2.50% now and 3.25-3.50% after this week), according to the FT. No other central bank is going to match this, let alone exceed it. It goes without saying the tell-tale indicator is not the overnight rate but rather the 2-year and 10-year notes. As for the 2-year, it hit a 15-year high of 3.86% on Friday and it quoted at 3.944% this morning. See the 10-year yield table comparison.

Depending on what else comes down the pike, and disregarding the navel-gazers who throw “pivot” back and forth like a volleyball, it seems obvious that the euro is doomed to sub-parity. The yen is likely to keep moving toward 150 (or more) and the BoJ will not intervene. Sterling is the oddball in the bunch, seeming headed back to 1985’s $1.0530 but also tremendously oversold and with a better outlook than Europe. EM’s are usually in the soup when the dollar is on a rally tear. Of course something can come along to disrupt the dollar rally, but we don’t see it yet.

Tidbit: It’s not something we follow and we admit to not understanding all the ramifications, but we heard from a Reader that foreign central banks borrowed a ton of dollars from the Fed last Thursday using the swap lines sets up in 2007/2010. The ECB borrowed $209.6 million and the Swiss National Bank, $50 million. The BoE took $10 million.

In the grand scheme of things, these are small amounts (the daily FX market being measured in the trillions), but assuming they sold the dollars to get their home currencies, the inflow may well have been a factor in the recovery of those currencies from the crash the day before due to the US inflation data and ensuing hullabaloo about what the Fed would do about it.

This is not “intervention” per se and beware that assumption of converting dollars to the home currency. After all, each country has dollar borrowers (drawing down or repaying) and perhaps the central banks preferred the Fed’s rates to market rates elsewhere. Why would central banks need liquidity? Still, there might be a message in here. It’s just in a language we don’t speak.

“In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.

“When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank’s account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.

“The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve’s balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability.”

Weird Tidbit: In Europe, new car sales suddenly recovered. Bloomberg reports the European Automobile Manufacturers’ Association says registrations rose 3.4% to 748,961 vehicles last month, led by a 16% y/y jump for Mercedes-Benz. Plenty of economists see new car sales as a decent leading indicator. With so many saying Germany will prove it’s already in recession with Friday’s PMI, it’s hard to swallow in this instance.


This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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