Economic Worries Intensify As CPI Hits 40 Year High
Central bankers across the globe are raising rates in response to inflation. The world has become increasingly volatile and dangerous with the war in Ukraine, China-Taiwan tension, Israel-Iran flare-ups, Covid lock-downs in China, and rampant inflation globally. The long-term consequences of inflation are quickly becoming a major threat to world harmony. Rising prices impact the poorest people most, and in any measure of inflation anywhere in the world inflation is at 40-year highs.
Once thought to be a problem for past generations, the combination of too much stimulus and a Fed that was certain (wrongly) that inflation would be contained even with zero interest rates, has put the Fed Chairman on his back foot. The Fed definitely has the tools to crush inflation, however, their blunt instruments to combat inflation could also create a recession or worse. Many important economic indicators are flashing warning signs: yield curve inversion, CPI over 5%, and oil doubling in price are major headwinds to the economy. Consumers are worried while businesses are struggling to keep up with increased costs and a lack of workers. Full employment complicates the story as the economy appears to be healthy, but, inflation readings this high and a Fed committed to multiple rate hikes in 2022 can quickly slow down economic activity (this is what the Fed is desirous of).
Interest rates have risen dramatically, especially on 30-year fixed-rate mortgages. With 30-year money near 5%, adjustable-rate mortgages are gaining traction as the preferred product. While ARM products carry interest rate risk after the fixed-rate period ends, the delta between ARM products and 30-year fixed products is wide enough to be the product of choice for jumbo loans. Should rates move higher (which is likely), expect housing demand to slow. There are already signs that housing has peaked as new home builders are sitting on more inventory, and second home sales are slowing. Finally, one important point to ponder is the massive amount of homes bought by investment companies such as Black Rock. These institutional buyers may flood the market with homes at the first sign of a slowing down. While a major downdraft in housing is unlikely, it is quickly turning into a buyer’s market in certain areas. Southern California remains supply-constrained. To date, the rise in rates has not materialized into a major slowdown as of yet. Caution remains the word of choice.