January 2024 - Monthly Market Rollup
Recession imminent. Inflation sideways in the near term and then possibly back up. Fed in the hot-seat as election looms. Commercial real estate a potential catalyst.
Welcome back to our new offering of a Monthly Market Rollup for the month ending January 2024. We are looking to send out these chart heavy market summaries at the end of each month for the foreseeable future. Entertainment only. Do your own research. Sources below each graphic.
We will be dividing these monthly notes up into a Recession watch, an Inflation section, and a Fed watch, so with that let’s get going.
Recession Watch:
It appears that multiple recession indicators are all showing an imminent recession is inbound.
Let’s look at some indicators:
Source: https://x.com/Econ_Parker/status/1749939545276141757
Source: https://x.com/GameofTrades_/status/1742531262391128209
Source: https://x.com/GameofTrades_/status/1752357281344426459
Source: https://x.com/GameofTrades_/status/1747706605540392992
Source: https://x.com/jessefelder/status/1747677666629869952
Source: https://x.com/dlacalle_IA/status/1747193563471888885
Source: https://x.com/MichaelAArouet/status/1746441340756336975
Source: https://x.com/GameofTrades_/status/1745505861227962787
Source: https://x.com/WinfieldSmart/status/1742892568805879817
Source: https://x.com/GameofTrades_/status/1748004821062545504
Source: https://x.com/LizAnnSonders/status/1747596061928034353
Inflation Watch:
Inflation looks like it is declining or staying flat for the near term, but might spike later in the year…
Source: https://twitter.com/AndreasSteno/status/1744012421709091021
Source: https://twitter.com/AndreasSteno/status/1746534560236503148
Though some shipping and freight costs are set to spike.
Source: https://x.com/GameofTrades_/status/1750522661426639215
Overall we might be looking at a repeat of 1970s style inflation:
Source: https://twitter.com/GameofTrades_/status/1748740637267230851
Fed Watch:
Given the Economic and Inflation setup, the Fed will have a challenging 2024.
Over the last four cycles (going back to the 90s) the average time the Fed took to start cutting rates, after having stoped hiking rates, was eight (8) months. This would put the first cut in March 2024 - given the last hike was in July 2023.
However, the potential for resurgent inflation looks ready to hit by late Q2, and might only be offset by price declines from the economic deterioration that seems immanent.
With the US election in the balance, market participants must make a bet on how political the Fed will be, and which way it might want the election to go.
Just two scenarios where the Fed could end up looking bad:
If the Fed cuts too fast or too quickly, then they will be open to criticism of political favoritism.
If they cut at all and then are forced to start raising rates again shortly thereafter to fight inflation, they’ll look ineffectual.
So with the potential to look bad on rates, it’s worth checking in on the Fed’s other toolbox: QE/QT:
Source: https://x.com/TaviCosta/status/1752196945215463770
The QT/QE lever seems much more flexible and responsive and much less political than rates. It is also already showing some movement as the Fed has -almost- moved back to buying assets recently.
For reference on rates - these next few graphics all show the number of months between the last Fed rate hike and the first Fed rate cut in different ways. Different average times exist based on when you start counting the cycles, and from different month counts by the different graphic producers.
Source: https://x.com/Rob_Hager/status/1512007964353200130
Source: https://x.com/airuzubieta/status/1655488542909374464
Source: https://x.com/ReutersJamie/status/1689988182018809857
If the Fed does start cutting then how much the Fed is likely to cut is something the 2yr might be able to help predict, as the 2yr often precedes the Fed Funds Rate - though it is not a perfect indicator:
Source: https://x.com/McClellanOsc/status/1747724059016855734
Conclusion:
With various Recession warnings blinking red, we see a near term Recession as likely amidst ongoing economic deterioration. The market’s reaction to said Recession, however, is anyone’s guess, especially as the market will attempt to anticipate the Fed’s response both in rates and QT/QE. Commercial Real Estate questions loom (more below). Add in an election year of fiscal give-a-ways and the dramatic market selloff might not materialize in the way everyone expects.
Numerous similarities exist between this period and the years of the Carter Presidency, and similar to that period we wouldn’t be surprised to see inflation rebound later this year as the fiscal giveaways of the election cycle combine with continued geopolitical pressures on shipping costs, resulting in a whipsaw effect on bond market.
The challenge for the Fed is that if we get to mid summer 2024 and inflation is surging and economic activity is falling, which way would they send rates? Or will they just keep rates flat and flip QT back to QE like they did during the regional banking crisis of 2023?
The Fed showed a tenacity on rate hikes last year even while they expanded their balance sheet to deal with the ongoing banking crisis. Moreover, the Fed’s QE during and after the Great Financial Crisis never resulted in the inflation that the fiscal giveaways of the 2020 Covid response produced.
Given all this, and the whispers from the Banking sector, we suspect the Fed will need to be very active this year with their balance sheet, probably using it first before any rate moves.
About those whispers, anecdotally, there are more than 1trn in unrealized Commercial Real Estate losses sitting at US Banks.
Source: https://x.com/tazEricM/status/1752704862725554234
Source: https://x.com/TripleNetInvest/status/1752496789058691100
With the economic deterioration of a Recession immanent, and coming inflation pressures in the back half of the year, the Fed should likely ‘Twist’ from residential Mortgage Backed Securities to commercial Mortgage Backed Securities in anticipation of a negative market event or be ready with QE and rate cuts to encounter one. Along with the political fallout that will come with missing their opportunity to do so.
Election year everybody! Time for some fun!
Until next month.