Fear of the Fed Comes Back Into Focus

Stocks fell at the open, capping several weak trading sessions. At the moment, the Dow is down 215 points and the S&P 500 is down .8%. Commodities are also broadly lower. WTI crude fell back to $91.50/barrel, gold is down .6% and copper is off by 1.6%. The bond trade is clearly risk-off, meaning that safer Treasuries are rising in price but riskier corporates are flat to down.

The Case-Shiller Home Price Index decelerated in June, and looks to be rolling over. The year-over-year rate of price growth hit 20% in April, but since then has slowed to 18%. That may not sound like much of a slowdown. But while still elevated, it’s the slowest rate since May 2021. Home prices have been somewhat sticky because of a structural supply shortage and a very strong job market. But other forces—rising mortgage rates, slowing sales, fears of an economic slowdown—are beginning to have an impact. The current volume of existing home sale transactions is down about 20% from a year ago. In a note to clients, Goldman Sachs predicts that home prices will flatten out over the next year. But critically, analysts don’t see price declines. In other words, a full-blown housing crash doesn’t seem likely.

The Bureau of Labor Statistics just released its monthly JOLTS report, which tracks job openings. The number of available jobs in the US rose unexpectedly to 11.2 million last month. There are about 2 open positions for every unemployed American. Despite widespread fear of economic recession, layoff rates remain low and quit rates are relatively high. The ultra-tight labor market stands squarely in the path of the Federal Reserve’s campaign to fight inflation. Obviously, the supply of workers is insufficient, so the Fed wants to bring back some equilibrium by driving labor demand lower. So far, it hasn’t been successful. Bloomberg Economics believes this will force the Fed to ultimately raise its policy interest rate to 5% (from 2.5% today). That type of aggressive monetary tightening is not priced-in to the stock and bond markets.

Economic growth forecasts by the Fed continue to edge lower. At present, the economy is expected to grow just 1.7% this year, followed by 1.1% next year. That’s considered anemic, but at least it’s positive, suggesting the Fed expects to engineer a “soft landing.” We’ll see.