Week In Review: Moody's Downgrades The U.S. To "Negative", Consumer Demand Slows As Delinquencies Rise

Key Events For The Week Ending November 10th, 2023

• The credit rating agency Moody’s changed the outlook for the United States’ rating from “stable” to “negative”. The Treasury Department appeared to disagree with the downgrade, similar to the reaction earlier this year when S&P downgraded the United States’ rating.

  The major events leading up to the latest downgrade were: an extremely disappointing Treasury bond auction this week (a detailed video on my YouTube and Rumble channels will be uploaded this weekend); soaring national debt levels coupled with accelerating government spending and the overall sentiment of deteriorating economic conditions.

• As expectations for inflation increased, consumer sentiment weakened for the fourth consecutive month: 60.4 in November vs. 63.8 in October. The trend is in line with the growing household debt, primarily driven by mortgages, credit card debt and vehicle loans.

• According to the Federal Reserve Bank of New York, credit card debt hit yet another record: $1.08 trillion as of the end of the third quarter, an increase of $154 billion year over year. Total household debt surged by $786 billion on a year over year basis to $17.29 trillion in the third quarter of 2023.

  Credit card delinquency rates surpassed pre-pandemic levels. According to the Fed, the highest levels of delinquencies are among consumers with student loans and vehicle loans.

• Long term mortgage rates decreased. This week the 30-year fixed-rate mortgage averaged 7.5 percent, according to Freddie Mac; while 15-year fixed-rate mortgage declined to 6.81 percent.

  The drop is primarily driven by a decrease in Treasury yields.

  

• The housing market continues to remain in the spot light. As the economy is slowing down and lending conditions are likely to remain tight, a rise in unemployment (this is precisely what the Federal Reserve would like to see as it lowers the rate of inflation) has the potential to result in an increase in foreclosures.

  If foreclosures increase and mortgage rates remain high, we should expect a sudden decline in home prices because the inventory would spike as demand remains relatively weak.

• The Federal Reserve officials - Jerome Powell, Fed Chair; Tom Barkin, Richmond Fed President; and Kathleen O'Neill Paese, St. Louis Fed Interim President - repeated that the Federal Reserve may still increase the fed funds interest rate if it deems necessary. The hike may be on the table during the Fed’s meeting scheduled for December 13, 2023.

  The possibility of a rate increase stands just slightly above 14%, with the market forecasting no changes through the end of the year.

  

• Following the latest, October Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) report, the probability of the United States going into a recession within the next 0-12 months hit the highest levels yet.

  Deutsche Bank estimates there is a 90% chance of a recession. As I discussed in further detail, the forecast increased as the result of financial institutions tightening lending standards and a weakening consumer demand.

• In a new research paper published this week, the Federal Reserve Bank indicates that the American banking system is “still vulnerable” with capital and liquidity issues. The research discusses growing risks and its less-than-promising expectations for 2024.

Thank you for reading! Have a wonderful weekend!

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