“Green shoots!” BofA’s Michael Hartnett sees them. Exclamation point and all.
In the latest installment of his popular weekly “Flow Show” series, Hartnett flagged the dramatic jump in refi activity across the US housing market and a relatively decent read on small business sentiment in suggesting a multi-month bond rally is beginning to have an impact on Main Street.
“The pop in refi activity and the most optimistic NFIB small biz survey since February of 2022 [are] the first signs the drop in yields is boosting animal spirits,” Hartnett remarked.
Note from the chart that small business moods are still below the long-term average even after four straight monthly increases. The index hasn’t printed above the 50-year average in 32 months.
“The road ahead remains tough for the nation’s small business owners,” NFIB Chief Economist Bill Dunkelberg said, in the organization’s latest survey titled, aptly, “Inflation continues to plague Main Street.”
Hartnett was quick to add caveats. So far, refis are driving the increase in application activity in US housing, which is to say there’s scant evidence to suggest purchase activity is poised to inflect. As for small businesses, capex and hiring plans remain “very weak,” Hartnett said, adding that “both need to improve to signal Fed rate cuts = soft landing.”
Note that the chances of a 50bps rate cut from Jerome Powell at the September FOMC gathering diminished on Thursday, when US retail sales came in strong and jobless claims fell.
Market pricing now implies fewer than 100bps of easing through year-end for the first time since the Sahm siren sounded.
The August vintage of BofA’s fund manager poll showed professional investors overwhelmingly view monetary policy as unduly restrictive. But absent a very weak August NFP headline, the Fed probably won’t go “big” next month, opting instead to start with a “regular” 25bps cut.
But if you ask Hartnett, they’ll have to cut by at least 200bps this cycle, and not necessarily because the economy demands it. Rather because of US debt dynamics.
Most readers have seen the figure above before. Treasury “needs” at least 2ppt of rate cuts just to keep America’s debt servicing burden from spiraling.
“[The] US national debt is up more than $1 trillion YTD [and] interest payments $900 billion in the past 12 months,” Hartnett went on, before walking through some additional, scary-sounding math. Interest payments, he warned, are “set to rise to $1.4 trillion by July of 2025” if the Fed doesn’t cut, and will be $1.2 trillion even if they cut by 200bps.
Between a “reversal of the fiscal impulse” (US government spending is poised to drop 5% YoY) and the cost of debt, there are “many Fed cuts-a-coming,” Hartnett said, waxing folksy.
[Narrator: Treasurys aren’t “debt,” they’re interest-bearing dollars, the interest is denominated in more dollars and the US is the universe’s only legal issuer of dollars.]
BofA’s graph = simple truth and beauty. Not sure the logic will hold but does anybody have a better (w/ data) call?
I still reminisce about the mid1990s when the concern was that with no need to issue treasuries what would happen to mortgages and loans tied to treasury reference rates. Ah the good old days.
Traditionally excessive government debt is addressed through inflation, repaying debt with cheaper currency. Historically a third world solution. I thought in my conspiracy mode that due to congressional and administration free spending ways particularly over the past 2 administrations that inflation was the way to go. The “new” monetary theory referred to in the narrator comment to justify the deliriously high and rising level of govt debt ignores the crowding out of variable govt spending by the rising cost of debt service.
Of course neither serious candidate for president is pitching fiscal sanity. I feel like the ability of the Fed to manage inflation is like the kid trying to stop up a leaking dam. Eventually the dam will give way and swamp the kid and the town.
So what does that mean for equities? Still sell the first cut?