The Fed’s “loath to impose” reality on liquidity takers.
So said BofA’s Jared Woodard, channeling T. S. Eliot while filling in for Michael Hartnett in this week’s installment of the bank’s popular “Flow Show” series.
2024, the bank noted, is already the “third best year for rate cuts.” By that they meant we’ve seen a few. A few rate cuts. And we’re likely to see a few more before the year’s done.
As the figure shows, 2024’s tracking for dozens of global cuts coming out of the three most onerous years for policy tightening in a generation. The dashed line shows BofA’s projection for another 43 cuts by year-end.
Despite the easing already delivered, “Wall Street needs still more,” BofA said, noting that $1.5 trillion of CRE loans will roll over the next two years.
If you’ve lost track of the CRE apocalypse story, you’ll be forgiven. It fell by the wayside in recent months. The media — and particularly the financial media — likes instant gratification stories, and it was always going to take a while for CRE problems to manifest. Those “lags” — the CRE lags — are very long, and very variable.
Office leases are long-term agreements and so are the financing deals on the properties themselves. A lot of businesses are probably still working with leases that date to before the pandemic. It’s hard to know who’ll renew and who won’t. And as the figure below, which uses MBA data, shows, the refi reckoning is only just beginning.
The maturity wall obsession arguably misses the most important subplot in the CRE story: The property tax question. Tax receipts from these buildings are probably going to shrink eventually. But that’s a slow-burning fiscal issue for local governments and, again, it’s not a story that works well with today’s hair-on-fire, 24-hour news cycle. “Nervous Cities Cast Wary Eye At Property Tax Assessments” can’t compete in the era of 140-character attention spans.
Anyway, that’s a bit of a tangent, but BofA mentioned it in a list of reasons why Wall Street needs more rate cuts. And don’t let it be lost on you (I’m sure it isn’t) that the Fed hasn’t even delivered one rate cut yet.
It’s not just Wall Street that wants lower rates. Woodard reiterated Hartnett’s talking points around Treasury “needing” Fed cuts to help manage America’s debt servicing costs. (Never mind that Treasurys aren’t “debt” and interest is anyway denominated in dollars, which the US government issues at will.)
Whereas Wall Street and (allegedly) Treasury want Fed cuts, Main Street needs them. The figure on the left, below, shows white collar job growth flatlining and the figure on the right is the same credit card delinquencies chart I highlighted here a few days ago in my Jackson Hole preview.
The implication — in case it isn’t clear enough from the prominent red annotations — is that a US recession’s imminent.
“Professional payrolls are nearly flat YoY, broad retail sales are flat YTD in real terms and 11% of credit cards are delinquent 90+ days,” BofA went on, adding that “past surges” in credit card delinquencies “showed an economy which was already in recession.”
Lower bond yields “correctly spot weaker macro,” Woodard said, before emphasizing that the best recession hedge is still the long bond.
With regard to the CRE maturity wall, banks and borrowers will do the same thing they have always done when faced with this situation: “Extend and Pretend”. Banks can give the borrower a one year extension- with the hope that rates come down and leasing improves.
Problem solved 🙂
Jackson Hole remarks by Powell as expected – inflation on path to target, employment now main focus, time for policy shift, no elaboration on how much or how fast.
Suppose -100 bp easing over next few months.
Likely effects include credit card rates ~500bp lower, homebuyers’ “buying power” 10% higher on mortgage rates 5.5%, lower deposit cost for banks, lower debt cost for large corporates – lots of stimulatory effects.
But not higher occupancy of distressed central business district office CRE. So, not relief on CRE loans and lenders. At some point, CRE has to come back into the headlines, most likely route is bank earnings reports.
He was emphatically dovish. Look at BBDXY reaction.
Hmm . . . on second thought . . . looking at 10Y vs FF, if FF comes down say 200 bp and FF/10Y curve gets to a little positive, then seems the bulk of decline in 10Y yield and hence mortgage rates has perhaps already been seen?