Mortgage data suggests impending Fed rate hike

This week’s charts include US interest rate data and labour market indicators, the recent policy rate decision in Brazil, and travel data for Singapore.

By 
Julius Probst, PhD
 on 
December 10, 2021

With the inflation rate surging to 6% in the US, it has become quite clear that monetary policy is relatively easy right now and that the Fed will have to hike interest rates soon. Historically, the spread between mortgage rates and the Federal funds rate can serve as a recession indicator. Whenever this spread narrows to less than 1%, a recession will follow, with the exception of the Covid-19 shock. Based on this benchmark, the Fed will be able to hike rates to at least 2% throughout 2022/2023, which seems to be consistent with estimates for the nominal natural rate of interest.

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There are many signs pointing towards a very strong US labour market right now. The prime age employment-population ratio has recovered much more quickly this time than after the previous four US recessions. The chart below compares the evolution of employment for the subsequent 48 months after the start of each economic downturn.

Macrobond trick: Just change the code in series list to perform the same analysis for “usunemployment”, for example.

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High-frequency data has been crucial during this pandemic. One of our recent data additions is job posting data from Indeed. In the two charts below, we have included job postings for certain occupations. Unsurprisingly, hospitality and tourism are among the worst performing sectors. Meanwhile, roles in IT (software development) and logistics have the highest number of job postings. 

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The heat map below is an industrial confidence indicator from the European Commission that tracks new orders. As you can see, the economic outlook has brightened substantially over the last two quarters across the EU. However, with the latest wave of Covid-19 hitting some European economies quite badly, the indicator will most likely show a deterioration for next quarter.

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In a recent chart pack, we showed how central banks in Eastern Europe have started to hike rates aggressively amidst surging inflation. Many emerging markets are now also suffering from rapid inflation, especially in Latin America. The chart below shows how the inflation rate in Brazil has recently increased to 10.7%, far above the upper limit of its central bank’s target inflation rate.

Similar to the 2013 taper tantrum, emerging markets are suffering from the dollar’s strength and the anticipated Fed tightening cycle. The Central Bank of Brazil hiked its policy rate by 150 basis points this week to 9.25%, but more likely than not, it will find itself still behind the curve as inflation already exceeds 10%.

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Speaking of emerging markets, the chart below shows the correlation between per capita income and private sector debt to GDP based on purchasing power parity (PPP). Richer economies have more developed financial markets and higher wealth to GDP ratios so can support higher debt levels. With Evergrande defaulting on its loans, you should bear in mind that China is an outlier. The country has the same level of private sector debt as advanced economies that are three times as rich. This is certainly bad news from a financial stability point of view.

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With Russia possibly preparing to invade Ukraine, it might be worth looking at global military spending. US defence spending is about 3.5% of GDP compared to Russia’s 4.3% in 2020. However, the Russian economy is much smaller than that of France. Total nominal expenditures exceed USD700bn for the US and only reach USD65bn for Russia.

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Finally, the chart below tracks the total number of passengers for Singapore Airlines, which has obviously fallen dramatically since the beginning of the pandemic. However, the airline has recently increased capacity, thus showing that traveller numbers is starting to normalise in Southeast Asia will occur. 

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