Morning Report: Goldman sees rate cuts in Q224

Vital Statistics:

Stocks are flat this morning on no real news. Bonds and MBS are down.

The upcoming week won’t have much in the way of market-moving data, however we will get housing starts, retail sales and the index of leading indicators. Earnings season is wrapping up as well with numbers from the big retailers this week.

Goldman expects the first rate cut to be in the second quarter of 2024. By Q2, “we expect core PCE inflation to have fallen below 3% on a year-on-year basis and below 2.5% on a monthly annualized basis, and wage growth to have fallen below 4% year-on-year,” chief economist Jan Hatzius wrote in a note Monday. “Those thresholds for cutting align roughly with the annual forecasts in the FOMC’s Summary of Economic Projections and the conditions at the outset of the last cutting cycle motivated by an intent to normalize from a restrictive policy stance as inflation came down in 1995.”

“Last year we initially took the view that the FOMC was unlikely to cut until a growth scare emerged, but we softened our stance earlier this year and have since assumed that a convincing decline in inflation would probably be enough to prompt cuts,” Hatzius said. “We made this change in part because Fed officials increasingly emphasized that once inflation came down, it would no longer be necessary or appropriate to keep the funds rate so high relative to estimates of the neutral rate.”

Property issues in China will almost certainly have an impact on global interest rates. China’s largest private property developer has missed payments on some of its bond issues, and sentiment is dour in the entire sector. If China enters a depression or severe recession, that will pull down global bond yields, and we should see all sorts of disinflationary impulses including a drop in commodity demand, a depreciating yuan and a flight to safety.

The real estate sector in China reached 30% of GDP, which is an eye-popping number which is way higher than the US during the bubble. Housing prices (as a percentage of income) are sky-high in many Chinese cities. The typical home in Beijing goes for 47 times median income. Note the US average is around 6 times, which is historically very expensive.