Quote:Around the world, soaring borrowing costs are squeezing homebuyers and property owners alike.  From Sydney to Stockholm to Seattle, buyers are pulling back as central banks raise interest rates at the fastest pace in decades, sending house prices falling. Meanwhile, millions of people who borrowed cheaply to purchase homes during the pandemic boom face higher payments as loans reset. The rapid cooldown in real estate — a leading source of household wealth — threatens to worsen a global economic downturn. 

While the slump so far isn’t near the levels of the 2008 financial crisis, how the decline plays out is a key variable for central bankers who want to tamp down inflation without hurting consumer confidence and triggering a deep recession. Already, frothy markets such as Australia and Canada are facing double-digit house-price declines, and economists believe the worldwide downswing is only getting started.  “We will observe a globally synchronized housing market downturn in 2023 and 2024,” said Hideaki Hirata of Hosei University, a former Bank of Japan economist who co-authored an International Monetary Fund paper on global house prices. He warns the full impact of this year’s aggressive rate hikes will take time to play out for households.  “Sellers often overlook signs of shrinking demand,” he said.

Quote:Not for the first time, inflation numbers caught the market by surprise. The bad news was the S&P 500 SPX, -4.32% saw the largest one-day decline in two years, slumping 4.2%. The good news if you’re checking your 401(k), you’re only back to last week’s levels, and futures are holding up in the early hours of Wednesday. One month of data is just one month of data, and there are still believers that the Fed in the not too distant future will stop the rate-hike campaign. “With inflation expectations almost back down to normal levels and broadening disinflationary pressure showing up everywhere except the official CPI, we still expect both headline and core inflation to fall more quickly over the next 12 months than officials currently believe,” said Paul Ashworth, chief U.S. economist at Capital Economics. “The pivot isn’t dead yet.” 

But what a rotten month of data it was. The first surprise of the day was that core CPI was much hotter than forecast, and two methods of slicing the numbers by regional Feds contained further bad news. The Atlanta Fed’s sticky-price CPI gauge rose to 6.1% year-over-year from 5.8%. Remember, that’s a weighed basket of items of prices that are meant to change slowly (think, menus). The Cleveland Fed’s median CPI, meanwhile, accelerated to 6.7% from 6.3%. If you use the old rule of thumb that the Fed has to hike interest rates above the core rate of inflation — and remember, that particular saw is on the Fed’s own website! — then the market is still vastly underestimating how high rates will have to go. Even after Tuesday’s inflation surprise, fed fund futures imply a terminal rate around 4.25%.

Quote:The price of copper — used in everything from computer chips and toasters to power systems and air conditioners — has fallen by nearly a third since March. Investors are selling on fears that a global recession will stunt demand for a metal that's synonymous with growth and expansion. You wouldn't know it from looking at the market today, but some of the largest miners and metals traders are warning that in just a couple of years' time, a massive shortfall will emerge for the world's most critical metal — one that could itself hold back global growth, stoke inflation by raising manufacturing costs and throw global climate goals off course. The recent downturn and the under-investment that ensues only threatens to make it worse.

Quote:The biggest risk none of us can see is the exposure financial institutions have and who is levered. That is scarier and could cause the Fed to stop with the tightening cycle — if they get a whiff a major financial institution is in trouble. That is clearly the lesson from [the bond-price action in the U.K.]. The Bank of England is fighting inflation and, all of a sudden, has to rescue pension funds. They are at cross-purposes. With Credit Suisse CS, +6.59%, we have one European institution in trouble. That is not systemic unless it creates runs on other institutions. My take here is the U.S. bank balance sheets are far less leveraged than they were in 2007. What might cause the Fed to stop tightening sooner would be some sort of worry about systemic financial risk.