September 22, 2022
🌅 Good morning! It's the fall equinox. But other measures are less in balance. You'll see.
Today's newsletter is 1,066 words, 4 minutes.
1 big thing: Balance sheet fright
The worst year for stocks since 2008 could still get uglier, as the Fed's effort to pull potentially trillions of dollars out of financial markets hits full steam, Matt writes.
Driving the news: The Fed opened up the second front in its war against inflation in recent months, moving to shrink its stockpile of nearly $9 trillion worth of U.S. government bonds — a process known as quantitative tightening.
- In September it upped the rate at which it's cutting its holdings, to nearly $100 billion a month.
- The Fed also continues to lift short-term interest rates, delivering its third consecutive hike of 0.75 percentage points yesterday.
Why it matters: The only previous attempt by the Fed to simultaneously raise rates and decrease its holdings of government bonds coincided with an ugly 20% stock market sell-off in late 2018.
- The S&P 500 is already down 21% from its peak early this year, after the Fed launched its effort to crush inflation by lifting short-term interest rates.
- The big question: With quantitative tightening just ramping up, is the other shoe about to drop on the market?
The big picture: When the economy went into a COVID-related nosedive in early 2020, the Fed started pumping newly created dollars into financial markets as part of its efforts to make sure the economy didn't become a smoldering crater.
- It did this by buying more than $4 trillion worth of Treasury bonds and government-backed mortgage bonds.
- Buying those bonds lowers long-term interest rates, which in turn lowers mortgage and auto loan rates, coaxing Americans into spending their cash instead of clinging to it in scary times.
- The plan largely worked, and auto and home sales surged during the crisis. (Some also blame it for adding to the current inflation issues.)
Between the lines: A side effect of the plan was the stock market's record growth, as the flood of newly created money sloshed through the system.
- The stock market rose 114% between March 2020, when the Fed announced its quantitative easing program, and its peak in January 2022.
- Some analysts think that the impact of the Fed's money printing and bond buying programs might have influenced the manic mood of the markets — meme stocks! SPACs! crypto! NFTs! — over the last couple of years, in which every slight downturn for stocks was met with traders who rushed to "buy the dip."
The bottom line: Now that the Fed is shrinking its balance sheet — effectively pulling a cool $100 billion out of financial markets every month — some expect the massive pandemic-era tailwind to turn into a massive headwind for an already troubled stock market.
2. Catch up quick
3. Rents are maybe peaking
See how the line in the chart ticks down a little smidge on the right? That's a clue that after more than a year of massive increases, rent growth in the U.S. is moderating, Emily writes.
Why it matters: Housing costs, including skyrocketing rent prices, are a major driver of inflation, as Matt explained last week.
What's happening: The U.S. median rental price fell last month for the first time since November 2021, to $1,771 from $1,781 in July, Realtor.com reported this morning.
Meanwhile, a couple of other data sets seem to confirm that at least for a month — rent increases weren't so painful:
- Median rents for single-family homes — which typically command higher prices than apartments — also fell slightly over the past three weeks, according to data from Altos Research.
- Rent prices in Manhattan, one of the hottest markets in the country, plateaued in August, according to a report also out today from brokerage Douglas Elliman.
- This was somewhat unexpected given that August typically sees the highest level of activity in the New York market, said Jonathan Miller, the CEO of appraisal firm Miller Samuel, who authored the Elliman report.
Zoom out: Rents are still near record highs, and these movements aren't yet a trend — just a one-month data point.
- Plus, as rising mortgage rates discourage home-buying it pushes more people into the rental market — driving more inflation. Quite the conundrum.
What we're watching: The rental market may only truly cool off if the economy enters a recession, Miller says.
4. Home sales are slumping
Sales of existing homes fell for the seventh straight month in August, as sharply higher mortgage rates slammed the brakes on buying activity, Matt writes.
Driving the news: Numbers published yesterday by the National Association of Realtors showed existing home sales (as opposed to new construction) slipping to an annualized rate of 4.8 million last month.
- That's roughly 20% lower than last year's breakneck pace in August 2021.
- Go deeper: Prices finally started to drop in the last two months, with the median existing home selling for $389,500, down nearly 6% from the peak of $413,800 in June.
Fed chair Jerome Powell acknowledged at his press conference yesterday that homebuying has slowed — and added that he thinks the housing market needs to experience a correction for supply and demand to become better aligned.
The bottom line: Home prices are likely to continue falling in the coming months — but affordability remains poor with 30-year fixed mortgage rates higher than 6%.
5. Bank CEOs in the hot seat
There was a brief but noteworthy moment when big bank CEOs testified before the House Financial Services Committee yesterday, Axios' Courtenay Brown writes.
- Rep. Al Green (D-TX) asked the seven CEOs — who are all white — to raise their hands if a person of color would lead their respective banks in the next 10 years.
- Just one did: Bill Rogers Jr., the CEO of Truist who took the helm last year.
The big picture: It was reminiscent of a similar question from Green in 2019. Then, he posed it to a group that included the CEOs of JPMorgan, Goldman Sachs, State Street, Citigroup, Bank of America, Morgan Stanley and BNY Mellon — all white males at the time.
- Then, none raised their hands when asked whether their likely successor would be a woman or person of color.
- A year later, Citi said its next CEO would be Jane Fraser — the first woman to lead a big Wall Street bank.
Today's newsletter was edited by Kate Marino and copy edited by Mickey Meece.