Key Economic Charts for Market Watchers

Jeffrey Roach (00:02):

Here in this latest edition of the LPL Econ Market Minute, I'll show you a few important charts that explain the macro landscape and why investors are experiencing such volatility. So first, housing affordability reaches a multi-generational low. In this important chart we see housing affordability is now the lowest since 1985 when mortgage rates were double digits. By the way, this affordability metric takes into account median home prices, household income, and the prevailing mortgage rate. And so in this case, affordability captures the uniqueness of each period. For example, in this current landscape, home prices have not moderated much despite high borrowing costs because housing inventory is so low. Those who refinanced in recent years, to amazingly low rates, have what I call the golden handcuffs, keeping them very content in their current homes. Second, monetary policy is tighter than meets the eye. This second chart, I think explains a lot.

Jeffrey Roach (01:12):

The San Francisco Fed created a proxy to the effective federal funds rate. What does it do? Why should investors care? Well, the proxy rate includes other market actions in addition to the target rate set by the Fed. Investors should care because this proxy rate illustrates how the markets are impacted by what the Fed is doing. And so in this case, the Fed's balance sheet management and its forward guidance is adding additional tightening on financial conditions. And this proxy rate gives investors the magnitude of the additional impacts on markets. As of last month, the Fed's policy actions tightened financial conditions even faster than what meets the eye. I think this explains a lot of the choppiness we see in markets. And now of course, rising geopolitical tensions clearly added a lot too. Third, services prices are moderating. The Fed was concerned about the stickiness of services prices, and we are now at the point where the inflation trajectory is favorable. Investors have a few different ways to track consumer prices. One is the CPI and another is the more comprehensive and favorable price deflator from the personal spending data. And so in this third chart, we see that services inflation took a bit more time in decelerating, but indeed these stickier prices have also turned over. So when you take the inflation data together with the proxy fed funds rate, you see a macro landscape that is somewhat tenuous and indicating that the Fed is nearing the end of its rate hiking campaign. If you want more insights on global market trends, follow us on social media and take care.