Fed Rate Hikes Not Just for the US Housing Market: Solus Strategist

• Due to the Federal Reserve’s interest rates hikes, US home sales fell.
• Dan Greenhaus predicted that manufacturing and other sectors would soon feel the effects from Fed tightening.
• According to Solus strategist, the US economy is slowly turning inwards like a large cruiseship toward weakness. 

The US housing market is struggling as a result of the Federal Reserve’s aggressive interest-rate campaign — and other sectors will soon feel the full force of its tightening too, a top asset management strategist has warned.

According to Dan Greenhaus (chief economist and strategist at Solus Alternative Asset Management), manufacturing could be one of the industries that will soon experience a similar slowdown.

He said, “If you’re not in the camp that I am in, you don’t believe 500 basis points rate hikes within a 12-month period or so results only in weakness in the housing markets.”

“The US economy is like a large cruise ship, which turns slowly. We’re making these turns towards weakness.”

In October, US home sales dropped 28.4% over the previous year due to buyers quitting. Rising interest rates are a factor in the decline of housing supply. They push up mortgage rates making it more expensive for buyers to borrow money to buy a house.

Economists warn that house prices could fall by 20% from current levels. That would bring down inflation — the Fed’s goal with its rate hikes — but increase the risk of a recession.

Higher interest rates mean that borrowing is more expensive in other industries, which can reduce investment levels.

According to Greenhaus, manufacturing is one sector that could feel the effects of the Fed’s tightening campaign. The S&P Global US manufacturing sector index fell to a two-and-a-half year low of 47.6 last week – with any reading under the baseline of 50 signaling that manufacturing activity is contracting.

Greenhaus stated that it was difficult to believe that there wouldn’t be a higher number of jobless claims, lower levels in employment gains, and a weaker manufacturing industry. Additionally, the housing sector will continue to suffer from weakness. The consumer will feel the brunt of these effects as we move into next year.

He stated that cross-sector weakness could cause companies to lose earnings in the coming quarters.

The US equity markets suffered briefly from third quarter underperformance due to blue-chip tech stocks such as Meta Platforms or Amazon. But the benchmark S&P 500 index has jumped 3.98% over the last month, thanks to investors’ optimism that the Fed will soon end its rate-hiking campaign.

Greenhaus said, “I think we should for the next few quarters, for sure expect that those earning expectations will continue to decline.”

Continue reading: Falling house prices will help to control inflation, but they also increase the likelihood of an extended economic downturn.