Are Rising Rates About To Crack The US Economy Amid Record Debt Levels?

Are Rising Rates About To Crack The US Economy Amid Record Debt Levels?

By Crush The Market

US Interest rates have been steadily rising since the lows in July last year, as the market reacts to both inflation pressures, FED commentary and 2 rate rises in 15 months. As a consequence interest rates have risen around 1.2% for US 10 year Government bonds since July 2016. Rising rates has created a major headwind for the US economy, as the weight of the massive debt levels for consumers and companies are starting to have a weakening effect on demand dragging the US economy towards slower growth. In spite of slowing growth economy the US stock markets are or near all time record highs as bullishness over the Trump presidency have overridden a weakening macro environment as stock investors look to the future with optimism.

Market Pricing 100% For FED Rate Rise For March

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Over the last few weeks the probability of FED rate rise in March has been climbing, as a series of press releases and comments from various FED officials, including FED chairperson Janet Yellen have shown their eagerness to raise rates this month. Due to FED officials comments the market has priced in a 100% probability of rate rise when the FED holds their Federal Open Market Committee (FOMC) meeting and release their statement on the 15th March US time.

US  Government 10 year Bond Yields Set To Break Out Towards 3.00%

With the recent talk regarding interest rate rises by the FED this week and the market now pricing a 100% certainty of FED funds rate rising by 0.25%, Government bond yields have once again started to climb higher for two straight weeks reaching previous resistance of 2.62% last Friday. (See chart below)

The important factor to note for the 10 year bond yields is if the 2.62% level is broken and closes above the resistance level indicated for the week, we will see interest rates move progressively higher towards 3.00% which is the next level of resistance.

US Govt 10yr bond yields chart
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Higher Rates To Hit Corporate & Consumer Credit Debt At Record Highs

If US Government bond yields move towards 3.00% over the coming months, a situation which is likely if the FED raises rates this week. This is going to have a major effect on slowing the US economy even further. The extremely high debt levels in the US, that were built up during a low interest rate environment created by the FED is now beginning to cause some serious problems for the economy and eventually stocks as well with small increases in rates having a larger impact on considerably higher debt levels.

The reason rising US Government 10 year bond yields is such an important factor in determining the health of the US economy, is because the majority of debt products for consumers and companies are priced from Government 10 year bond yields. In other words everyone will experience a rate rise and be negatively effected because the US is drowning in debt, with consumer credit and companies debt levels excluding financials are at record highs. (See charts below)

Crush The Market addressed the negative effects that a significant rise in rates would do towards the US economy back in November as rates began to spike higher in November with the election of Donald Trump. To view this article click the link below:

Surging Bond Yields Signalling Pain Not Growth Ahead For US Economy

Since November’s article the rise in yields has played out as predicted with a slowing in a number of key macro economic data announcements, as the economy continues to slow in a rising interest rate environment causing pain for consumers, companies and the economy overall.

US Total corporate debt
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Consumer Credit  Debt Led By Student & Auto Loans

The picture is no different for the average consumer who is struggling under record levels of debt, with debt levels rising by approximately 1 trillion since the previous peak reached before the global financial crisis in 2008 & 2009.

The majority of the gains in debt levels have come across from an exponential increase in student debt as tuition fees for college are far outpacing CPI increases. The other main contributor for such a significant rise in consumer credit has been the boom in auto loans to the average consumer. Auto sales had previously been booming from increasing in credit for a number of years. Now as consumers are tapped out with much more debt since 2009, delinquencies are rising in the auto loans market as higher interest rates are biting hard on consumers disposable income.

US total consumer credit owned & securitized
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The rapid increase in debt since 2009 together with increasing rates since July last year, has already been felt within the economy as various parts of the economy are now showing further continued weakness.

Higher Rates Slowing Lending Growth For Consumers

The rise of around 1.2% in US Government 10 year bond yields since July has already started to impact demand for more debt by consumers over the last year. Since the start of 2016 loan creation growth has slowed dramatically from between 9 – 10% per year to a current growth level of between 4% – 4.6% pa. Although the growth rate are in the positive the accelerating of debt growth levels is impacting retail sales within the economy. For example auto sales from the Big 4 auto manufactures have fallen by up to 11% in January 2017 from a year ago. To view auto sales data shown in my recent US economy article Click here.

US total loans and leases chart
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Atlanta FED Slashes Q1 GDP Forecast to 1.2%

In the beginning of February this year the Atlanta FED forecasting team had set Q1 GDP as high 3.4%. Since February economic data has been released showing further deterioration and slowing in the economy with economic data missing expectations. As a result of this the Atlanta FED has had to  continually reduce their forecasts all the way to 1.2% as of March 8th. Depending on pending new economic data releases in the coming weeks we could see Q1 forecast fall below 1%.

US Atlanta FED GDP Forecast
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US Gasoline Sales Begin To Fall Again

US Gasoline sales have been in structural decline for several years now, as the chart has shown below falling by over 50% since 2005.  After reaching the lows in 2014 gasoline sales began to start rising again as the economy began to gather pace as jobs and debt accumulation began to accelerate. However recent data has shown Gasoline retail sales have once again resumed their downward trend and starting falling as weakness in the economy  from higher rates is started to effect consumer demand.

US total Gasoline retail sales by refiners
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Federal Government Receipts Now Negative Y/Y – First Time Since Last Recession

Similar to Gasoline sales US Federal Government receipts were growing strongly up to 2014 reaching a growth rate close to 14% y/y. Since 2014 recent high Federal Government receipts have been falling dramatically over the last 2 years, having just recently turned negative falling -1.1% Y/Y for the first time since the last recession in 2008 /9. (See chart below)

Having a closer look at the chart on the right hand side, you will notice that the majority of the decline in growth rates occurred over a relatively short time frame in 2016. This coincides with the similar time frames when interest rates stopped falling and began to rise rapidly in the second half of 2016.

US Federal Government receipts Y/Y chart
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US Restaurant Operators Same Store Sales Falling

The most recent data available for restaurant same store sales has been released, showing that December 2016 same store restaurant sales are the weakest they have been for in 3 years. In addition Q4 comparable sales and traffic is also down from a year ago, indicating that the restaurant industry is reeling as consumers cut back spending out for food.

US restaurants performance snapshot
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 Does A Rising Interest Rate Environment Matter To Stocks?

According to history a rising rate environment has serious implications to the future performance of the market. Since the 1970’s 7 out of 8 occurrences where interest rates cycles began to tighten resulted in some large corrections in the stock market. With the last tightening cycle resulting in a 56% fall in the markets in 2009.

The tightening cycle has been running for close to 9 months now as has already had a major impact to the grow rates of the economy slowing dramatically over the same period. With the potential for another rate rise occurring this week, its quite possible we could see 3% US 10 year Government bond yields in the coming months playing further havoc on the economy. Based on the last 45 years of data a tightening cycle in the US has not be very kind to stocks either as the economy reacts to higher rates.

S&P 500 chart & Tigthening cycle
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Warning! – The Insiders Are Rushing For The Exits

Company executives are selling around 10 to 1 relative to buying trades of company stocks despite record prices for stocks. The buyer / seller ratio is also on a downtrend since peaking in late 2015  and the beginning of 2016 (See chart below)

When executives are selling in such large amounts it usually means they are seeing the writing on the wall for future earnings and prospects for the companies they run. Perhaps since interest rates are rising and the economy is slowing its starting to place pressure on future earnings targets. The next quarter earnings may provide further insights, especially since companies are conducting record amounts of buybacks that are financed from previously low rates of  debt.

The recent strong performance of stocks in late 2016 and early 2017 has masked a serious deterioration in the US economy that started as early as 2014 – 2015. With interest rates about to break out higher on the way towards 3% we could see the last legs of the economy knocked out bringing stocks down with them as earnings will start to fall again with weaker consumer demand filtering through to lower sales results.

US Insiders buyer / seller ratio
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Stocks Bullishness At Record Highs While The US Economy Is Approaching Recession

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Disclaimer: This post is for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.

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