We may have all come on different ships but we’re in the same boat now – central bankers including the Fed must have shared this sentiment lately in their fight against the spiraling inflation. The US housing and mortgage markets are adjusting to the new reality of higher-for-longer interest rates and have entered a rapid correction phase, potentially triggering a downward trend of property prices: Our take on the repercussions for the US economy testing recessionary waters. No one would have crossed the ocean if he could have gotten of the ship in storm: The shipping industry is in for a another record year in 2022; however, shipping capacity remains a challenge as investments have not quite been in line with the sector’s capability. Plus our weekly wrap-up on relevant economic events this week.
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- The US housing market is adjusting to the new reality of higher-for-longer interest rates. Interest rates are rising rapidly – the Fed delivered a third consecutive 75bp hike during the September FOMC meeting – and unlikely to decrease much in 2023 as the FOMC will be keen to restore its inflation-fighting credibility. In this context, the pass-through from higher Fed Funds rates to mortgage rates today is the strongest since the early 1980s.
- As a result, housing and mortgage markets have entered into a rapid correction phase. Mortgage applications have slumped to their lowest level in more than 20 years, while the stock of unsold homes is reaching historical highs, signs that housing demand is dropping rapidly. Meanwhile, a rapid slowdown in deposits and monetary indicators suggests that financial institutions could start pulling back mortgage lending availability soon.
- Property prices have held up thus far but are the next domino to fall: We expect real property prices to slump -15% within the next 12 months, which will push the US economy into a recession in 2023 (-0.7%). However, strong aggregate household balance sheets should soften the blow. Unlike in the mid-2000s, household balance sheets are in better shape – overall debt is much lower relative to incomes, the average credit quality of that debt is higher (sub-prime mortgages have declined), net worth is very high (reducing the likelihood that large swaths of households slip into negative equity) and cash balances remain significantly above pre-pandemic levels.
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- 2022 will be another record year for container shipping companies. We expect the sector’s revenue to jump by +19% y/y and its operating cash flow to grow by +8% y/y. While freight rates have fallen -32% year-to-date, they are still well above the pre-pandemic average (USD6,400/forty-ft box vs. USD1,450/forty-foot box). Freight rates are likely to remain elevated in 2023 (USD 4,550/forty-foot box), given the delayed delivery of new vessels, new regulations on CO2 emissions, continued truck-driver shortages and higher prices for fuel, containers and vessels.
- Higher-than-expected cash generation has helped liners comply with new ESG standards (with investments growing by +61% y/y in 2021). In addition, gross debt fell -5% y/y in 2021 and we expect companies to deleverage further in 2022 and 2023 (-16% and - 11% y/y, respectively), which will be crucial in a context of increasing interest rates.
- However, despite increased capex, shipping capacity will not increase as much as expected nor as fast as desired. The recent investment efforts, although huge, have not been in line with the sector’s capability (cash from operations grew by +274% in 2021 on average) and most of the capex increase is explained by the fact that the price of new vessels doubled last year, not because of larger new orders. In addition, while 35% of orders should be delivered in 2023 and 39% in 2024, these ships are likely to modernize the fleet instead of fully expanding it, as IMO 2023 regulations will force companies to retire older ships.
- The Fed delivered the third 75bps rate hike this week, sending risk assets globally into a tailspin. During the press conference Chairman Powell also welcomed the unfolding correction of the housing market, saying that it will allow home to become ‘more affordable’. We expect US real property prices to decline by -15% in the next 12 months.
- Producer prices and wages in Europe are still on an upward trend. Italian general elections will take place on Sunday after the short electoral campaign during the summer; the right wing Brothers of Italy is leading the polls at 25%.
- Bank of Japan intervenes in FX markets for the first time since the late 1990s to stem the Yen’s depreciation trend.
- China’s activity data were better than expected in August (from a low base and low expectations), but weak economic momentum remains the base case. Markets readjust for a higher and more aggressive policy rate trajectory.
