US home sales have fallen as the Federal Reserve’s interest-rate hikes feed into borrowing costs.
Manufacturing and other sectors will soon feel the effects of Fed tightening too, Dan Greenhaus said.
The US economy is turning slowly like a large cruise ship toward weakness, the Solus strategist said.
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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.
Manufacturing is one industry that could soon suffer a similar slowdown, warned Dan Greenhaus, chief economist and strategist at Solus Alternative Asset Management.
“If you’re in the camp I’m in, you just don’t believe that 500 basis points of rate hikes in a 12-month timeframe or so results in only weakness in the housing market,” he told CNBC’s “Closing Bell: Overtime” on Saturday.
“The US economy is akin to a large cruise ship that turns very slowly, and we’re in the process of making those turns towards weakness.”
US home sales fell 28.4% year-on-year in October, as buyers stepped away. Rising interest rates tend to weigh on demand for housing because they push up mortgage rates, making it more expensive to borrow to buy a home.
Some economists have warned that house prices could be set to fall 20% from their current levels. That would bring down inflation — the Fed’s goal with its rate hikes — but increase the risk of a recession.
For other sectors, higher interest rates make borrowing more expensive, reducing investment levels.
Manufacturing is one sector that could be set to feel the brunt of the Fed’s tightening campaign, according to Greenhaus. 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.
“It’s hard for me to imagine that you’re not going to have a higher level of jobless claims, lower levels of employment gains, a weaker manufacturing sector, ongoing weakness in the housing sector and ultimately a consumer that bears the brunt of those effects as you get further into next year,” Greenhaus said.
Cross-sector weakness will likely drag down companies’ earning expectations over the next few quarters, he added.
Third-quarter underperformance by blue-chip tech stocks including Amazon and Meta Platforms briefly weighed on US equity markets in October. 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.
“I think we should, for the next couple of quarters, for sure expect those earning expectations to continue to decline,” Greenhaus said.
Read more: Falling house prices will help the Fed tame inflation – but they also increase the risk of a prolonged economic downturn
Solus Strategist
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