The Fed is trying to slow down hiring to dampen the upward pressure on wage and consumer price inflation, but cooling down the labor market takes time, and while corporate worries about labor shortages have declined, they are still well above pre-pandemic levels, see chart below.
US households are in excellent shape, the ratio of liabilities to net wealth has declined 50% since the 2008 financial crisis, and household leverage is currently at levels last seen in the early 1980s, see chart below. If the unemployment rate rises, consumer spending will slow down, but the starting point for US households is very strong.
The IMF is forecasting a recession in the UK and Germany, and close to potential growth in the US, which on its own would argue for a stronger dollar, see chart below.
Hotel demand has slowed down in recent weeks, occupancy rates, RevPAR, and daily rates have started moving lower, see chart below.
There are no signs of weakness in movie theater visits, the weekly data for box office grosses is rising and now above pre-pandemic levels, see chart below.
Data for leveraged loan default rates and bankruptcy filings show that a default cycle has begun. This is not surprising given that the Federal Reserve’s goal with raising interest rates is to slow the economy down to help lower inflation. Now that we’re in the early stages of a default cycle, the question looking ahead will be: How much will default rates rise? This is especially important for credit markets. The bottom line is that investors now need to carefully monitor whether this will be a soft or a hard landing.
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Weekly data shows that the number of people going to Broadway shows continues to rise. No signs of a slowdown in household consumption of this type of luxury consumer spending.
Office occupancy rates have moved sideways for the past six months, and with hybrid work models now well-established, a 50% occupancy rate may be the new permanent level in most metropolitan areas, see chart below.
Data for leveraged loan default rates and bankruptcy filings show that a default cycle has started, see charts below.
This is not surprising. The entire goal of the Fed with raising interest rates is to slow the economy down to slow down inflation, and adding tighter bank lending standards increases the risk that the slowdown could come faster.
Our latest credit market outlook is available here.
