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Morning Report: Quiet week ahead


Vital Statistics:

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

The upcoming week is shortened with Thanksgiving, and a short session on Friday. In terms of data, there isn’t much that will be market-moving. We have a 20 year bond auction today at 1:00 (remember the 30 year auction from a couple weeks ago was a disaster) and we get the FOMC minutes on Tuesday. Other than that, it should be a quiet week.

The Index of Leading Economic Indicators slipped in October, according to the Conference Board. “The US LEI trajectory remained negative, and its six- and twelve-month growth rates also held in negative territory in October,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board.  “Among the leading indicators, deteriorating consumers’ expectations for business conditions, lower ISM® Index of New Orders, falling equities, and tighter credit conditions drove the index’s most recent decline. After a pause in September, the LEI resumed signaling recession in the near term. The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending—due to depleting pandemic saving and mandatory student loan repayments—to tip the US economy into a very short recession. We forecast that real GDP will expand by just 0.8 percent in 2024.”

The office commercial real estate market is getting worse. The Wall Street Journal reported this morning that only 1 out of 3 expiring mortgages for securitized office buildings was paid in full. This is worse than the 2008-2009 crisis. Most of these maturing mortgages simply can’t be rolled over because the underlying collateral is shot.

Case in point: Deutsche Bank paid $500 million for an office property in Manhattan about a decade ago. The property is currently worth between $150 million and $200 million. The building is 30% occupied and anchor tenant Bank of America just let its lease expire. The highest and best use of the building is probably residential or mixed, but that will require some capital expenditures. Not only that, but we have a glut of multi-family under construction, so it isn’t clear how great of an option that is.

These problems in commercial real estate are going to be a headwind for the economy as it causes banks to tighten credit. This could be the catalyst to get the Fed cutting rates sooner than it wants to. Note that Citi is set to eliminate thousands of jobs. Retail looks to be weak as well.

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