“It’s not the terminal rate that matters… If you keep high rates at a steady state something will break.”
- Danielle DiMartino Booth
What an Hedgeye Investing Summit that was! You can catch up on all 9 replays HERE if you missed them live. Each guest came with their own unique views and insights on the market making every conversation different. I highly recommend catching up on these over the weekend (or while grinding through earnings season).
For me I get to hear what pieces of data each guest is looking at to create their views and add them to my dashboards. There is never too much data in my mind.
Although there was one topic that I thought that multiple guests brought up without any data: the international mortgage market. After working through multiple nights to assemble this data set, I understand why not a lot of people are quoting the data… It’s not easy to find. But first, let's talk about yesterday quickly.
Back to the Global Macro Grind…
At one point the S&P 500 was down -2.4% on the day and then flipped to up +2.6%. Why, why, why? I don’t know… But I do know that the VIX risk range yesterday was 29.11 – 34.94.
The VIX got within 3% of the top end of the range and closed 10% away from the top end of the range (in the F Bucket no less). While all of this happened, implied rate hikes have added in +1.12 MORE hikes since the last meeting. As Keith always says, “today is not a day to do nothing.”
Now that we got through that, let's get to the fun part! The global nature of these rate hikes. As you can see from the chart below, rate hikes are happening everywhere (except for Japan). What I’m going to try to do today, is add another perspective to these numbers, so they aren’t just numbers. They are the inverse representation of peoples hard earned capital.
In the US our market is currently implying that the Fed will stop raising rates by February 2023 (at 4.8%) and we won’t see a full rate cut until November 2023. In the Eurozone it is being implied that rates will begin its steady state in June 2023 (at 2.88%).
For the BoE they are expected to raise the central bank rate to 4.8% by February that will add ~£201 ($217) to a homeowners monthly mortgage payment on a fixed rate mortgage of £146,000 ($157,000). That is £2,412 per year ($2,604). But this is grossly understating the situation since the average home price is £281,161 and the mortgage rate is typically ~+171 bps above the central bank rate (on a 5yr Fixed).
That’s cool and all but aren’t mortgages on a 30yr fixed rate? NO, that is only in the US and doesn’t exist internationally. Every country is different but fixed rate mortgages are 1-5yrs with most being 3yrs. Which means that your mortgage rate gets changed quite frequently and depending on the market conditions lenders change from Fixed to Variable rate mortgages.
Let’s go back to what happened 3 years ago then? April of 2020 was when M2 internationally started accelerating briskly across the globe and lasted until Feb 2021. Central bank interest rates were largely at all time lows up until June of 2021. People were given an influx of cash and mortgage rates were at all time lows. Naturally home buying spiked in June 2020.
That means on a 3yr fixed rate mortgage lenders are about to need to refinance those loans in June 2023… In the UK as many as 1.8m borrowers will need to refinance next year with ~300,000 deals ending in October and December. In New Zealand ~88% of loans are fixed rate mortgages. 49% of those mortgages will need to be refinanced in less than a year. The list goes on…
Buuut that is all fixed rate mortgages where we will have to wait ~1yr to see them refinanced. What about variable rate mortgages which get updated monthly? Check out the Chart of the Day where in Hong Kong (97% of mortgages are variable), Finland (97%), Norway (90%), Poland (89%), Greece (85%), and South Korea (80%).
But, but, but the Fed will stop raising rates in December…. Cool, the Eurozone is implying 5.4 MORE hikes by December and is implying that rates will go steady till September of 2023 after 9.2 MORE rate hikes. This is what Danielle was talking about in her quote of the day from the Investing Summit. Not only are we raising mortgage costs internationally, but the consumer is going to have to last until at least September of 2023 with elevated mortgage payments. This is one of many reasons why Quad 4s don’t end when the Fed turns dovish and stops raising rates…
The Reserve Bank of Australia has said that “if the cash rate rises to 3.6% the share of borrowers facing a minimum debt-services ratio to income of +30% will increase to 25% of borrowers by the end of 2023.” The current cash rate is 2.6% in Australia and is implied to hit 3.6% by April 2023.
A small note on the CoD; finding out the percent of mortgages being variable by country is not only very manual, but also changes as rates rise and fall. I tried to compensate by taking 10 year averages where I could look at outstanding balances instead of new mortgages. All of this is to say, these numbers are approximations and the number of floating rate loans as interest rates climb will likely accelerate.
Now for a little housekeeping because I always hear, "yeah Ryan but how do I play this in the US." This is a tighter consumer spending story. Here is the IVOL Table for the country ETFs in this early look (countries without IVOLs: Poland $EPOL, Norway $NORW, Portugal $PGAL, Finland $EFNL, Ireland $EIRL, Israel $EIS, Denmark $EDEN, and Austria $EWO). Here is a list of Global Real Estate ETFs ($VNQI, $RWO, $HAUZ, $RWX, $GQRE, $IFGL, $AVRE, $WPS, $BLDG, $FPRO, $CHIR). They all have different exposures based on property type and country but the trend on these is much more apparent. Then finally in Brendan Ahern’s Investing Summit interview, he highlighted a bunch of companies with high international exposure, I doubt those are the only ones in the S&P.
The more I dig into the international landscape, the more I think back to my first F Bomb on the macro show.
I’ll continue to go back to this: Imagine you get paid in Norwegian Krone, your currency is down -21% in one year, your food costs are up +12.1% YoY, energy costs are +26.1% YoY, and your mortgage rate went from 1% to 3.25% (+325%) in one year. On top of that your outlook is a continued strong dollar which will continue to drive inflation and mortgage rates that will peak in May 2023 then stay there until at least September 2023. But when the rates start to drop they aren’t going back to 1% it is a slow path down…
- IVOL Discount Callouts: Turkey $TUR, Timber $WOOD, Cannabis $YOLO, Silver $SLV
- IVOL Premium Callouts: Sweden $EWD, Malaysia $EWM, Clean Energy $PBD, Leisure $PEJ, Rare Earth Metals $REMX
- 2-10 Spreads remain inverted in the US, Canada, Mexico, Sweden, Poland, and Philippines. With large DoD Decelerations in the UK, Australia, Spain, Switzerland, and Portugal
- India’s 5yr CDS created a cycle high yesterday
- Chile Raised interest rates on Thursday
- China’s Inflation Rate Accelerated to +2.8% YoY
- Germany wholesale Price Accelerated to +19.9% YoY
- Israel Inflation stayed flat but at the highest level since 2011
Have any questions? Want answers? I will see Macro Pro subscribers in The Arena today with Daryl for an Ask Me Anything session at 11am. Reach out to if you'd like access.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.63-4.05% (bullish)
UST 2yr Yield 4.06-4.49% (bullish)
High Yield (HYG) 69.63-72.93 (bearish)
SPX 3 (bearish)
NASDAQ 10,168-11,101 (bearish)
RUT 1 (bearish)
Tech (XLK) 113-125 (bearish)
Utilities (XLU) 60.45-65.95 (bearish)
Energy (XLE) 76.12-85.53 (bullish) `
Shanghai Comp 2 (bearish)
Nikkei 25,617-27,305 (bearish)
DAX 11,914-12,619 (bearish)
VIX 29.20-34.90 (bullish)
USD 110.18-114.39 (bullish)
EUR/USD 0.960-0.992 (bearish)
USD/YEN 143.98-147.91 (bullish)
GBP/USD 1.079-1.134 (bearish)
CAD/USD 0.718-0.739 (bearish)
Oil (WTI) 83.11-93.66 (bearish)
Nat Gas 6.25-7.10 (bearish)
Gold 1 (bearish)
Have a great day out there,
Ryan Ricci
Macro analyst
