Shrinking Demand

Posted By Darren Winters on May 1, 2022

Shrinking Demand

When will shrinking demand in the economy put pressure on monetary policymakers to revert to easing?

The bond market rout sent the 10-year treasury yield to almost 3%, which jumped 120 basis points since January. Rising treasury yields, particularly the 10-year treasury, is a big deal because this debt instrument is a yardstick for setting interest rates for home mortgages and car loans.

So the rising 10-year treasury yields increase borrowing costs and causes shrinking demand as business reigns in investment plans and households borrow and consume less.

Higher mortgage rates are already shrinking the demand for home purchases

Affordable credit facilitates the purchases of homes, and when mortgage rates rise more people are priced out of the market, particularly young first-time home buyers.

Creating a new generation of rentier class will not improve social cohesion. Instead it could widen the political polarity between left and right.

The drop in purchase applications was evident across all loan types,” according to an April 27, Mortgage Bankers Association (MBA) report.

Mortgage application has fallen by 8.3% on a seasonally adjusted basis from one week earlier.

“With mortgage rates increasing last week to the highest level since 2009, applications continued to decline. Overall application activity fell to the lowest level since 2018, with both purchase and refinance applications posting declines. Refinance applications were 70 percent below the same week a year ago when the 30-year fixed rate was in the 3-percent range,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

Shrinking Demand

So following in the footsteps of bonds and stocks, real estate could be the next asset bubble to pop.

Sales are sagging, inventories are piling up to their highest level since 2008 and despite soaring material and labor costs, that could put pressure on home prices.

The paradigm shift in work from home could also mean that commercial real estate is even more vulnerable. The digitalization of everything is also a headwind on commercial real estate prices. Car dealerships could soon disappear from city centers, similar to travel agents. Tesla has built a global brand without dealerships.

Shrinking demand in an economy means a contraction in haulage activity, bearing in mind that most goods are transported by truck

Trucking demand is “near freight recession levels,” according to Bank of America.

So The bellwether Cass Transportation Index slowed further in March.

“We are certainly seeing a freight slowdown and spot market correction, but in our view, it is too early to call it a freight recession,” wrote Cass in March.

The way the rates are, you have to run twice as hard to make ends meet,” Dan Guzman, a San Antonio-based fleet owner, recently told FreightWaves.

But the likes of trucker Dan will probably be finding the grind to make ends meet has got a lot harder. Half a world away the Ukrainian Russia war is disrupting supplies of natural gas, fertilizers, and essential food commodities. We are experiencing a global cost of living crisis due to war, and supply-chain disruptions and that can only lead to shrinking demand for non-essential goods and services.

With recession at the doorstep, how much longer can the Fed play its hawkish tone despite the rising risk of stagflation and shrinking demand.

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