Markets took this data as a sign that the Fed is closer to a turnaround, as was the case after housing prices started falling in 2007. This in turn led to lower rates across the curve and risk-on which pushed stocks up, and in turn a weaker USD. However, we believe that the fall in US housing prices from very high levels is actually welcomed by the Fed as it should dampen household demand (through the wealth effect) and thus lead to a softer labour market and weaker wage growth and inflation, which is what the Fed is trying to achieve. The Fed want’s tight financial conditions for a while so as to dampen the pressure in the US economy – financial conditions are now close to neutral – which means that they will continue hiking rates until they see clear signs of lower wage/price growth. This will take more time. We expect a 75bp rate hike from the Fed next week, and 50bp hikes in December 2022 and February 2023
The key data for the Fed this week is not housing prices, but the Employment Cost Index and PCE inflation out this Friday. The Employment Cost Index is of great interest for the Fed as it shows actual wage increases, which are a key driver behind the rise in service inflation. Consensus expects 1.2% Q/Q growth, down from 1.3% last quarter. The Fed will need to see clear signs of weaker wage growth before they are satisfied and we struggle seeing that will be the case with this week’s data when the US labour market is still very thigh. Hence, the USD weakness that we currently see could very well end up to be short-lived if the ECI index shows high(er) wage growth, which in turn should push rates up and stocks down again.
- Nordea
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