we're joined now by john separates uh
portfolio manager at Tocqueville asset management,
john, let's talk about the markets here.
What's your reaction to the markets at the open on the back?
Of course, this economic data we got out in the midst of earnings season.
Well, thanks for having me on Chloe.
I think what you're seeing here is the market
still seems to be driven by expectations on inflation
and what the Fed may or may not do with in regards to interest rates,
because your earnings are from the banks are are mixed for sure.
You know, per the article,
you guys just the story you just had on the debt ceiling is we're knocking on
that door and and the markets have really
steadily climbed here to start the new year.
Now, speaking of the Fed,
you said by late spring that the Fed could be striking a more dovish tone.
What factors are leading you to believe this is
this still your stance on the back of kind
of what we've seen in terms of retail data and cooling inflation in terms of the P.
P. I
Well, you know, again,
another story you guys just talked about in terms of mortgage rates.
I think the Fed wants mortgage rates to stay elevated.
The Fed does not want to see mortgage rates get lower because they really don't want,
it's strange to say, but they do not want euphoria,
they do not want optimism going into this housing season,
uh they want because they know that housing is a is
pivotal to overall economic growth and if the economy grows,
it's going to keep inflation high.
So they want interest rates to be elevated to make sure that they take another
hit for the housing market to go
lower and hopefully continue to bring inflation lower
The inflation data by and large really is slowing its slowing across the board.
What hasn't happened yet is the unemployment rate hasn't
really ticked up and although we're seeing more layoffs,
uh the continuing claims that are reported every
Thursday morning still or around 225,000 or so.
So, you know, you're not seeing much give on the employment side yet, so,
but but the rate of change on inflation really does seem to slow.
So I wouldn't be surprised if come, you know,
may or june the Fed may not take any action in terms of monetary policy,
but I would presume that their language is going to be
less hawkish than it is today or was back in december.
Yeah, John Let's follow up on your comment on mortgage rates there,
obviously these high mortgage rates, putting pressure on the housing market,
although we are seeing some possible indications of relief there.
What's your outlook for housing in 2023?
Yeah, I would suspect that it's going to be continued pressure.
Um you know,
affordability is at its lowest point and in quite some time because
you've got this massive run up in home prices through the pandemic.
And now interest rates are at the highest levels, they've been in nearly 15 years?
Oh. And by the way, taxes have increased over that time as well.
And the cost of everything else,
has so to buy a house to to afford it and to furnish
it is very expensive right now and all those have to be figured into
to the underlying environment.
And I would assume that buyers who are in the market, who are not,
who are in the market to paying cash or
using some sort of leverage taking on a mortgage
are going to use their buying power because they
know the sellers are in a tough market.
So I would assume that home prices will continue to go down.
Of course, housing is very, very local.
Um I would assume home prices continue to go down.
I would assume the supply of homes on the market
will take up because more people will try to sell
and you have maybe less buyers in general. So I would presume another
year of weakness in the housing market, if the housing market is strong,
that means that inflation will most likely be higher,
which means the Fed is probably going to raise
interest rates higher or keep rates higher for longer.
But I personally am not foreseeing that.
Alright john and you mentioned big banks earlier, you know,
obviously earning season kicked off with these big banks
reporting it's been a bit of a mixed bag.
Obviously, still some Pain from a pullback and investment banking,
but some banks actually benefiting from higher interest
rates when it comes to wealth management.
So, what,
what's your insight on what we're seeing from this
sector and what it says about the overall economy?
Yeah, I think the first, uh maybe this,
this dovetails into the fact that the labor market is actually pretty healthy.
Um you know, with the unemployment rate of 3.7% or whatever it is under 4%.
Um you know, the balance sheets on the banks remain in great shape.
This is not 2008 by any stretch,
they have more than enough capital on
their balance sheet and their loan portfolios,
although
deteriorating slightly are still well below
2019 levels in terms of the quality
of their loan portfolio. So
that's a very good thing from the bank side,
what the banks are trying to deal with on the operating side is a, you know,
keep expenses under control and a rising rate environment, which is not easy to do,
particularly because wages are,
but more specifically,
the front end of the yield curve
is higher than the yield curves are perverted, meaning
that banks have to pay up for deposits
and by and large loans that they're making or less. So
that spread there is really hurting bank profitability.
So unfortunately, we're gonna have to leave it there. But thank you so much.
That's john Petraeus of Toqueville, thanks for your time