Markets are experiencing a relief rally as sellers have ruled the day for the past 7 weeks. Equities have been over-sold for quite some time, but the fundamentals at this point do not support a lengthy move higher. Consumer behavior has begun to change as higher inflation and higher interest rates have forced consumers to shift their spending habits.
There are now visible cracks in the housing market as mortgage applications have been down 9 of the last 11 weeks and housing data—New Homes, Pending Homes, and Building Permits—have been declining. The employment data this week will be of key interest as big name employers have indicated layoffs coming in the near future. The dislocation between demand and supply is causing some inventories to build and retailers to adjust their workforce in distribution sectors. The Chicago Fed’s National Financial Conditions Index has weakened over the past 18 weeks and is looking reminiscent of the last major recession. Lastly, the Fed released minutes from the most recent FOMC meeting and the schedule of future rate hikes looks to stay on a hawkish pace. Over the last six major rate hiking cycles by the Fed, each cycle has led to recession. If history serves as a guide, it’s possible that a “soft landing” will not be achievable.