March Minutes

Good morning you beautiful bastards, February had some very interesting sea changes to go over, so let's jump right into it, starting with an update from the Fed.

Inflation in the US increased in January, with the personal consumption expenditures price index rising by 5.4% from the previous year, exceeding the Fed's 2% target. Additionally, the core PCE-price index, which excludes food and energy prices, rose 4.7%. This acceleration in PCE comes after a higher-than-expected Consumer Price Index (CPI) report and a jobs report with a better-than-expected performance. These reports have caused the S&P to lose almost all of its 2023 gains, indicating that the fight against inflation will take longer than the market was initially expecting. With inflationary pressure continuing, Federal Reserve officials are expected to raise interest rates in the near future. The implied probability of a 50 bps rate hike at FOMC's next meeting has risen to 36%, and the 2-year treasury yield has increased to the highest levels since 2007. Philip Jefferson, a Federal Reserve governor, warned that high inflation may come down slowly given the current imbalance between labor supply and demand, and the large share of labor costs in the services sector. In contrast, Susan Collins, President of the Federal Reserve Bank of Boston, sees initial signs of deceleration in goods-price and wage inflation due to recent improvements in supply chains and labor supply.

This stubborn inflation is being seen primarily by American millennials, particularly those in their 30s. Reports are showing that this age group has accumulated debt at historical rates since the beginning of the pandemic. According to the Federal Reserve Bank of New York, millennials' total balances exceeded $3.8 trillion in Q4 2021, which is a 27% surge from late 2019, and the fastest pace of debt accumulation since the 2008 financial crisis. Millennials' debt buildup could increase the generational wealth gap that was already on the rise for them. Many millennials began their careers during the 2007 to 2009 recession with no bargaining power, crimping their earnings ever since. Even when the economy was doing well, millennials felt as though their financial gains were fragile, making them more hesitant to take the risks that would drive the broader economy, such as starting a business or investing. Inflation is forcing millennials to spend more on gas, groceries, and rent, eating into any of their pre-pandemic savings. The Federal Reserve's campaign to curb inflation has pushed up interest rates on credit cards and other types of loans, making it impossible to use debt as a tool to help them get through these tough times. The average credit-card balance for millennial borrowers was approximately $6,750 in January, up 26% from three years earlier.

Fun topics to talk about, nevertheless, needs to be brought up so everyone can paint a clearer picture of what awaits the economy in the near future. Now, onto the evolving situation with oil:

Since the Russian invasion of Ukraine back in February 2022, US crude exports have surged to fill the gap left by the West's rejection of Russian energy. Seaborne cargoes to Europe have jumped 38% compared with the previous 12-month period, making the continent a larger destination for US crude than Asia. As a result, US energy is becoming a foundation of European energy security, according to energy historian Daniel Yergin. This has created a lucrative proposition for oil traders and speculators due to the price gap between European and US crude. US natural gas shipments to Europe have also more than doubled, cushioning the continent's households and manufacturers from Russian supply cuts.

Despite the surge in investments predicted to enter into the US oil fields in 2023, it is unlikely to result in the same increase in oil production as previous spending sprees due to limitations on the industry's growth. Shale fields across the US are maturing, resulting in fewer sweet spots to drill and overall increased production costs from inflation. As a result, oil and gas producers are spending more to extract the same volumes of hydrocarbons. In 2022, the increased spending resulted in a 4% increase in oil production.

Up next, the topic on the tips of everyone's tongues...

The Housing Market

The apartment rental market in major US cities has experienced a decline in rents over the past six months due to the influx of new apartment supplies that are expected to continue this year. Despite recent gains, new home sales in the US remain below their year-earlier level, with high home prices and mortgage rates causing buyers to hesitate. The number of homeowners planning to sell has decreased, but inventories remain significantly higher than they were a year ago, leading to slower year-over-year asking price growth. Although the housing market is not working optimally for both buyers and sellers, there are still transactions taking place, even during the lower months of winter.

The median listing price grew by 6.5% over last year, and the typical asking price growth for for-sale homes has slowed to its lowest pace since June 2020. The mortgage rate has remained high between 6% to 7%, but the homeownership rate reached its highest 4th quarter reading in over a decade of 65.9%. New listings for homes on sale decreased by 18% from one year ago, while the number of active inventories grew 67% from one year ago. Homes have spent an additional 24 days on the market compared to this time last year, and for-sale homes remain 40% fewer than pre-pandemic levels. According to the National Association of Realtors, January 2023 saw a 0.7% decrease in existing-home sales from the previous month, which was the longest streak of back-to-back monthly drops on record dating back to 1999. High mortgage rates were cited as a reason for this decline, with the average rate on a 30-year fixed mortgage rising to 6.32% in its biggest one-week increase in four months. 

The decline in home sales is of concern since housing and housing service-related expenses account for nearly 1/5th of the US's GDP. While the decline is not as dire as the housing market's struggles back in 2010, this could still be cause for concern. On the flip side, it could be good news for the Federal Reserve, as a decline in home sales could prevent the need for aggressive future rate hikes, although unlikely. Either way, the decline in demand could result in lower home prices, making homes more affordable for the average person.

Last month, the Biden administration stated its plans to cut mortgage insurance costs for lower-income home buyers. The announcement comes as the average 30-year fixed mortgage payment across the US is $3,048 and the median payment is $1,672. The Federal Housing Finance Agency (FHFA) hopes that the move to reduce friction for first-time buyers will save them approximately $800 per year. While this equates to around 4% of the median payment or 2.2% of the average, the government is attempting to chip away at these high payments and recognizes that home ownership is a key component of the US economy.