Juggling Dynamite

The US dollar touched a five-month high against the loonie this week (shown below since late 2020, courtesy of my partner Cory Venable) as the Bank of Canada held at 4.5% and hawkish talk from the US Fed increased odds of a US overnight rate of 5% on March 22.

With recessionary data and credit stress compounding, the allure of a 5% risk-free rate in the world’s most liquid currency is understandably enticing global capital flows desperately seeking safe havens.

Canada’s 10-year Treasury yield topped with the loonie last October at 3.68% and has since retreated to 3.158% as Treasury bonds rallied. With Canada’s economy stalled out and financial stress spreading, the short-lived rebound from January through February is now in the rearview mirror, and a retest of the 2.80 area is next on deck.

With cash equivalents paying more than 4% and the highest grade bonds yielding interest payments and capital gains, the case for holding riskier assets is slim to none. David explains further in the segment below. Happy Friday.

David Rosenberg, founder and president of Rosenberg Research, joins BNN Bloomberg for his view on the markets as the BoC and the U.S. Fed divergence occurs. Rosenberg expects a recession in the upcoming quarters. He adds an earnings recession is underway, advising investors to stay away from the equities market and instead focus on a fixed income. Here is a direct video link.

FOMC chair Powell disappointed equity markets this week with testimony reiterating his insistence that financial conditions must keep tightening (through higher for longer interest rates and ongoing balance sheet reduction “QT”) amid growing strife throughout the world economy.

Indeed, Powell unapologetically explained (and he’s correct) that higher unemployment, lower economic activity and less financial speculation are needed to punch the inflationary impulse below 3 percent.

As US short-term rates have moved above 5 percent, longer-term Treasury bonds have rallied, causing their yields to fall. The US 10-year yield is at the same level today as last October when the overnight rate was still 3 percent. (Canadian yields have followed a similar pattern). The 2s/10s spread gapped to -108 basis points, the most inverted since 1981.

The ten-year minus 3-month yield spread hit -106bps. This is the most negative spread differential since the housing-led double-dip recession of 1980-81. The seven previous instances of this spread going negative since 1967 (red circles below, courtesy of JP Morgan and ISABELNET.com) signalled an incoming recession without any exceptions.

Even with lagging unemployment rates still near historic lows, households are behind on their debt payments by the most since 2008 (US data is shown below since 2005). The Fed projects that 2 million Americans will lose their jobs over the next year.

US mortgage applications have fallen to the lowest level in 28 years, lower than during the 2008 recession. Well beyond the tech sector, layoffs in the economically-significant construction industry are in a cyclical uptrend.

The Bank of Canada reiterated that its rates are on hold (but still doing quantitative tightening) as it watches even worse data unfolding in Canada’s housing sector amid record household debt.

No central banks are racing to the rescue soon—# bravenewworld.

Well explained, as usual.

In this video, we discuss why most of the market was unable to predict the current 2023 housing crash and how this housing meltdown could continue to unfold into the rest of 2023. Here is a direct video link.

In January, the combination of a 15% price cut and lower mortgage rates caused an increase in affordability. In February and early March, mortgage rates surged back towards 7%.

Buyers immediately felt the sudden decline in affordability and pulled back, even with new homes marked down 15%.

Applications for new mortgages fell to the lowest level since 1995.

See charts at The real reason home prices have been falling.