If Free-Markets Still Exist, These Relationships Ain’t Good
First, federal funds rate (yellow shaded area), 10 year minus 3 month Treasury spread (black line), new housing permits (blue line), and initial unemployment claims (red line). Shaded boxes are interest rate hiking cycles.
It is a pretty easy set of causal relationships. During each interest rate / business cycle;
Fed raises the Federal Funds Rate…
Causing the spread between short and long term lending to nearly or fully invert (shown by 10 year minus 3 month Treasury)…
The loss of profitable lending and rising rates pushes housing permits to peak and ultimately decline…
The stall or outright decline in housing creation is followed by slowing jobs creation and rising unemployment claims.
Typically this is the onset of a recession and another rate cutting cycle is set to begin.
Below, dropping out the FFR and dropping in the Wilshire 5000 (representing all publicly traded US equities, green line). Typically, permits are in decline and the party is over before equities realize everyone has already taken off.
Just for fun, 1967 through 1986, I invert unemployment claims versus permits, with shaded boxes representing rate hike cycles.
And 1987 through 2018, inverted claims versus permits, with shaded boxes showing rate hike cycles.
In short, economic winter is here… but what that means for asset prices is unsure given the quantity of asset-boosting initiatives between the Fed and Federal Government.