4 trading themes for 2023: #1 Never underestimate the spending power of the US
There are really only two camps in financial markets heading into 2023.
- The group that thinks the Fed has hiked too much and the economy is going into a tough recession
- The group that thinks the economy holds up and that high rates linger
Put me in the second camp, but only in the US.
I can see the arguments for both and this is going to be a data-traders’ market.
I believe the most-important thing to understand for 2023 is how global mortgage markets work.
The US works on a 30-year fixed, which is one set payment for the entire duration of the mortgage, with no penalties for refinancing. Two years ago, those payments fell to 2.6% and even at this time last year were at 3.1%. So the vast majority of American homeowners who purchased before 2022 are locked in. So long as they don’t move, they won’t feel any pain from higher rates via their homes.
I’d even argue that Americans still haven’t fully benefited from refinancing in 2020 and 2021. As the pandemic fades, the lower payments are being redirected into long-planned travel and some people are finding they have more disposable income than ever.
At the same time, student loan rates were pinned at zero by Biden and remain there with the possibility of forgiveness still to be decided by the courts (and upside risk in 2023).
Of course, Americans still have lines of credit, auto loans and other forms of debt where they’re feeling higher rates. We will be hearing many stories this year about people who are losing cars, boats, RVs and other pandemic excesses. I worry about that but I think that so long as the vast majority of consumers continue to spend and the jobs market holds up (those two rely on each other), then the US economy will surprise to the upside in 2023.
How that feeds back into inflation is a key question for 2023 but I can envision a path where inflation undershoots in a weak economy because…
…the rest of the world is different
While the Fed’s effects on the US consumer are largely indirect, that’s not the case in much of the world.
In Australian, for instance, 60% of home mortgages are on variable rates. The remainder are on fixed terms from 1-5 years so a good chunk of those roll off annually and reset higher. It’s similar in the UK, Canada and many other countries.
The 30-year fixed mortgage shields the US consumer from the harshest direct impacts of rate hikes while homeowners in the extremely overvalued home markets in Australia and Canada are often facing monthly payments +$1000 higher than a year ago.
So while many countries have been able to track the Fed towards higher rates, they’ve hit a limit on how much they can hike and how long they can hold rates high.
So with the Fed and the RBA you have two central banks that have ostensibly done the same thing but in the real economy it’s critically different. That difference will be the defining feature of currency trading in 2023.
Of course, there’s a wealth effect from lower house prices in the US and Americans are particularly sensitive to stock market losses but on net Americans are going to come out far ahead. I believe that in the months to come, we will see US consumer spending surprise to the upside over and over again.
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