The economic magnifying glass (September): Summer is over

August ends and September begins, and with it a new course that promises to be very interesting.

This month the markets have suffered a lot of volatility. In fact, the VIX rose as much as 30% in a matter of a week.

This volatility was caused in large part by the speech that Jerome Powell, chairman of the Federal Reserve, gave at the central bankers’ meeting in Jackson Hole.

In his speech, Powell stressed that monetary policy must continue to be restrictive, that is, interest rates must continue to rise, even at the cost of causing some pain to families and companies.

This is not something you hear very often from the Fed chairman. On top of that, referring to interest rates, he also said that “the July increase was 75 basis points and at our next meeting in September another such unusually large increase might be appropriate.”

All this generated sales in the global equity market worth 2 trillion dollars in 8 minutes. There is nothing.

In Europe, one of the biggest concerns is inflation and energy prices, and there will probably be a lot to talk about in the coming months, but for now we are going to see a summary of the economic news of the last month.

CHART OF THE MONTH

Undoubtedly, one of the markets that is being watched the most is real estate, due to the fact that it is suffering a resounding fall.

Homes Sold In The United States

The real estate market is one of the most advanced indicators of the economic cycle. Much attention is paid to it because in almost all recessions investment in this sector is reduced.

This is so because the real estate market greatly affects consumer behavior: when the price of housing rises, optimism increases, since households see themselves with more assets, and spend more. In contrast, when prices fall, consumption cools.

As you can see from the image above, new home sales in the US are plummeting since the 2020 peak.

What has happened for such an event to occur? Again, the cause is the rise in interest rates by the Federal Reserve. In the United States they have gone from having the cheapest mortgages in history at the beginning of 2021, to the highest in the last 10 years in a matter of a few months.

30yr Mortgage Rate

And why is all this important? Because it helps us to know where we are in the economic cycle. When a recession hits, it usually starts with a decline in the real estate sector, along with declines in other indices. After this come the decline in corporate profits and, finally, unemployment.

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What is an economic recession? The NAHB index is already below 50, which is when the bearish sentiment in real estate begins to show. Added to this is the fact that the S&P Homebuilders Select Industry index has fallen 27% so far this year. Data not very flattering for the sector.

MACROECONOMY

UNITED STATES
Last month it could be said that there were 3 relevant events: two of them bad and one good. Let’s start with the good.

In August, the results of unemployment in the month of July could be verified, and they were surprisingly good, since they showed an economy with full employment. To be more specific, 528,000 jobs were added, more than double the estimates! Bringing the unemployment rate to pre-pandemic levels of 3.5%.

Although the unemployment data is very hopeful, there are others that unfortunately are not so. US productivity, that is, the output of goods and services per hour worked by all workers, plunged for the second quarter in a row.

This usually means an increase in labor costs, which causes inflation to remain high. It fell at an annual rate of -4.6% in the second quarter after falling -7.4% in the first quarter.

The other bad news is that the Flash US PMI Composite Output Index, an index that represents expected business activity in the manufacturing and services sectors, fell 2.7 points this month, from 47.7 in July to 45.0, its second month consecutive contraction. This is super important, since the service sector accounts for almost 80% of the economy.


This is due to the fact that the service sector saw a contraction in demand, and therefore manufacturers were forced to reduce production in the face of lower demand, and all this because of the rise in interest rates and inflation, which make people’s available money is less.
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EUROPE

In Europe, the United Kingdom raised interest rates by 50 basis points, leaving interest rates at 1.75%, these being the highest since 2008.

As for the Eurozone, the macroeconomic situation does not look very good. In fact, the price of energy continues to skyrocket. One of the most affected countries has been Germany, where the price of energy contracts for next year (considered the European benchmark) has shot up to almost €1,000 per megawatt hour for the first time in history.

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In cash, the price of electricity has risen 720% so far this year. An increase of such caliber can bankrupt many companies and generate serious economic problems.

On the other hand, one might think that the drop in oil prices of almost 20% since the beginning of June could help, but the reality is that the depreciation of the euro practically nullifies this effect.

However, the unemployment rate remains relatively low at 6.6%.

As for the PMI, as in the United States, it fell to 49.2, which indicates a reduction in the commercial activity of the entire Eurozone.

LATIN AMERICA AND THE CARIBBEAN

In Latin America, the most notable is the inflation in Colombia and Chile. It is true that Venezuela and Argentina have suffered disproportionate inflation for years, but Colombia currently has an inflation of 10.21%, the highest in 22 years, while Chile has 13%, the highest in 30 years.

On the other hand, in Mexico working poverty, that is, the percentage of the population whose labor income is not enough to acquire a basic food basket, was 38.3%. If you think about it, the fact that a third of the population in the country cannot afford to buy a basic basket of food with their salary is a very serious problem.

Another fact to take into account in recent weeks in Latin American countries is foreign debt.

During the Covid-19 pandemic, many countries chose to increase external debt to combat the social and economic crisis that it brought with it in 2020. However, the world economic situation and the increase in the price of the dollar make the debt automatically rise. , and the risk of default (that the loans cannot be repaid) seems to increase.

What is external debt?

With the behavior of the US currency, the base currency for foreign loans, foreign debts have become a problem. The country that suffers the most from this effect is Nicaragua, where its external debt has exceeded the value of its GDP by 467 million dollars.

ASIA

In Asia, China is entering very dangerous territory due to a possible crisis in the real estate sector.

Why is it worrying? Because it represents a third of its economy and 70% of the country’s personal wealth. In addition, the size of the Chinese economy means that any crisis it suffers could have repercussions in the rest of the world.

The key is that Chinese citizens prefer to invest in real estate rather than the Chinese stock market. Insatiable demand from investors has led to Ponzi schemes in which developers sell houses (that aren’t even built), use the money from the sale to start more projects and sell new unbuilt houses, and so on.

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Buyers seeing this, started riots throughout the country.


Nearly half a million people have lost their savings as banks indiscriminately lent money to property developers who now face a cascade of defaults.

The government’s strategy is to lend more money to finish the houses. It only remains to be seen whether this strategy can revive investor confidence or they are simply delaying the inevitable.

VARIABLE INCOME

The stock markets experienced declines mainly due to statements by central banks: In the United States, the Nasdaq fell -4.67%, and the S&P500 -3.49%. In Europe, the EuroStoxx50 also fell -3.94%.

Regarding the sectoral evolution, within the American stock market, the energy sector once again stood out with an advance of +3.6%, while technology, real estate and health were the worst off with corrections of -5, 29%, -5.28% and -5.17% respectively.


FIXED RENT
US bonds reacted with falls to Powell’s words, especially short-term ones. The US two-year bond yield rose to 3.47%, its highest level since November 2007.

European bonds were infected by the movement, and also began to discount the possibility that the ECB could raise rates in September by even +75 bps

In some countries, the risk premiums had significant increases, taking the Italian and the Spanish up to 230 and 119 basis points respectively.

RAW MATERIALS
In the month of August there have been ups and downs in some raw materials. Brent fell more than 11%, but recovered part of the ground after Saudi Arabia reported that OPEC could cut production after observing the drop in demand.

Gold, despite inflation, fell -2.79%, and copper and aluminum, two materials closely related to industry and construction, fell 0.2% and -3.19% respectively, what follows is not a good sign.

FOREIGN EXCHANGE

As for currencies, the dollar continued to rise without brakes against the rest of the currencies.

This may favor many of the large European companies that are exporters, benefiting from a weaker euro, but it also has a negative effect on European energy spending, since it increases the price of oil causing inflation in Europe to persist.

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