Written by: Harrison LaHaie
What’s in the News
Equities have had many consecutive green weeks as some believe that due to last month’s inflation report, there will be some sort of Fed pivot. The 10-year, however, has risen in contradiction to that sentiment. U.S. sales of new homes fell 12.6% year-over-year in July, likely due to a decrease in affordability. Pending home sales fell by less than expected but reached their lowest level since April of 2020. Home sales are slowing faster now than in 2007 (not to make a direct comparison between the two very different environments). Jerome Powell poured cold water on markets in his Jackson Hole speech. Reinforcing what has been voiced by other members of the FOMC, Powell noted that premature loosening of financial conditions would be a mistake and that the Fed will do what it takes to bring inflation down to its target 2%.
Economic Outlook for CRE
Mortgage originations for commercial real estate were up nearly 20% year-over-year. This is likely indicative of participants in the market becoming more acclimated to the Federal Reserve’s rate hiking cycle, learning what to expect. As the Fed has now mostly ditched forward guidance, there may be some shocks to CRE in the second half of the year. Following Powell’s recent speech, lenders and borrowers will be expecting rates to climb higher until inflation reaches a tolerable rate for the Fed. Asset classes that have strong fundamentals such as multifamily and industrial will likely continue to outperform in the second half of the year. As demand falls, the asset classes that have the highest scarcity will do the best.
Looking Ahead
The waters have muddied as to what the end of the year will look like. Until July, inflation seemed to be unstoppable. While it is likely that inflation will come down in the coming months as energy prices dip, it may not be at a rate that the Federal Reserve will be happy with. Powell’s recent speech made it clear that the Fed is not going to pivot off a tightening path. Quantitative tightening is set to double its rate on September 1st. Liquidity will dry up for financial markets. The recent rally in risk assets was not at all what the Fed was looking for. With the housing market slowing down rapidly, output shrinking, and prices still rising, the outlook for the next 12 months remains poor. There may be some relief in Q3 as wages grow and inflation slows down, but the Fed’s tools for slowing down inflation will make financial conditions increasingly tight. As output has shrank, financial conditions put pressure on businesses, and wages grow, unemployment is likely to tick up at some point in the next 12 months.
Sources: Globe St, WSJ, First Trust, Federal Reserve.