Southwest Water Shortage

Good Afternoon,

Although we're finally getting a breather from inflation and jobs numbers this week, there's been plenty to keep things interesting. On Monday, China slashed rates by 10 bps, igniting fears of a possible global downturn. This was followed by new guidance from the Fed, who released the minutes from their July meeting on Wednesday.

This week we're diving into plunging oil prices, drought in the Southwest, and a housing slowdown that's sweeping the country.

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In the News

Market forecasts are powered by Kalshi.com

It's been another interesting week. Markets are both cutting their expectations that the Fed will hike rates by 75 bps in September and betting the housing market will cool in August. Markets are also making a complete U-turn on their predictions regarding monthly oil prices.

Less is More

Following an unexpected rate cut by China's central bank, the price of oil tumbled this week. And while that may sound like great news for that road trip you've been putting off, let's break down why that could be very bad for the economy.

China released a slew of economic data earlier this week, and it was not pretty. Industrial output, property investment, and retail sales all missed estimates. The data also showed that the jobless rate for individuals aged 16-24 climbed to roughly 20%, an all-time high.

Although concerning, the bleak report did not stun investors. Due to China's strict "zero COVID" policy, large port cities like Shanghai have been shuttered for months at a time in 2022. These lockdowns have hampered manufacturing, restricted imports, and shaken the world's confidence in China as a trade partner.

The negative impact of the zero COVID policy has been compounded by China's property crisis. Fueled by real estate giants defaulting on their debts, China's real estate market has been crumbling. Compared to the same stretch in 2021, residential property sales have plunged 31% in 2022. New floor space has also fallen off a cliff, dropping 45% this year alone.

The sputtering of China's economy has raised concerns that a global recession may be on the horizon. Given that it's the world's second-largest economy, decreased consumption from China would be bad news for the entire world. Countries that trade with China would be forced to cut back on production and exports, leading to decreased growth and higher unemployment.

Countries like South Korea and Germany have already felt the aftermath, running a trade deficit with China for the first time in more than a decade in July.

Kalshi markets are forecasting just a 20% chance that China's GDP will grow by at least 4% in 2022. In the beginning of June, markets pegged this probability at 97%.

Where's My Water

Between raging wildfires, $7 gas, and a historic drought, the Southwest has been through it this year. But don't pour one out for your friends in the Southwest tonight. Ship them whatever you were planning on pouring out instead.

On Tuesday, the federal government announced historic water restrictions for Arizona, Nevada, and California. The decision followed a new report from the Department of the Interior, which projects Lake Mead to dip below 1,050 feet at the start of 2023. If the projection is accurate, this would put Lake Mead at below 27% its capacity heading into the new year.

These restrictions were first introduced by Camille Touton, chief of the Bureau of Reclamation. Touton stated in a June Senate hearing that, in order to preserve the Colorado water basin, over 2 million acres of water usage would need to be cut by 2023. Touton threatened that if Arizona, California, and Colorado fail to figure out the cut amongst themselves, the federal government will be forced to step in.

This dire situation has sparked a three way blame game between Arizona, Nevada, and California, with each state urging the others to cut back on their water usage.

In a recent interview, John Entsminger, general manager for the Southern Nevada Water Authority, expressed frustration that California has not done more to reduce water usage. Entsminger referenced the fact that Nevada has significantly scaled back their use of water, banning water-intensive lawns and non-functional turf, but California has not made similar concessions. Entsminger stated "you have to have a contribution from the sector that uses 80% of the water... That’s not law, [or] politics, it’s just math."

Kalshi markets saw the grim future of Lake Mead from a mile away. Right before the report from the Department of the Interior was released, markets predicted a 98% chance that Lake Mead water levels would dip below 1045 feet to start 2023.

Dream Back-up Home

If you're dating a real estate agent right now, I really hope you don't work for the Federal Reserve.

Data on Thursday revealed that U.S. existing-home sales fell for a sixth straight month in July. The report showed sales fell 22.4% year over year, the largest annualized drop since 1999. Contract closings for previously-owned homes also fell 6%, sliding to its slowest pace since May of 2020.

Lawrence Yun, chief economist of The National Association of Realtors, called it a "housing recession."

This recent negativity is shared by U.S. home builders. On Monday, The National Association of Home Buyers announced its gauge, which measures home builder sentiment, fell 6 points in August. This drop pegs home builder sentiment at its lowest point in two years.

The cooling of the labor market has been sparked by rising mortgage rates, which has priced out prospective home buyers from the market. Data released last week showed that mortgage payments now claim 24% of incomes, driving the average price of a U.S. single-family home to an all-time high of $413,000 in July.

Rising mortgage rates have been primarily driven by recent rate hikes by the Fed, who has tightened monetary policy in an effort to drive down inflation.

However, minutes from the Fed's July meeting hinted that mortgage rates could come down soon. Officials stated "there is an emerging concern the Fed could tighten more than necessary," providing hope that large rate hikes may be a thing of the past come 2023.

Kalshi markets are predicting a 39% chance that the Fed will hike rates by 75 bps or more during their September meeting. Markets are also predicting a 10% chance that the price of a U.S. single-family home will grow by 1% or more in August. This is down from 46% two weeks ago.

Lit's Pick

For today's Lit's Pick, we are taking the "Yes" for S&P 500 yearly closing price between 4400 and 4599.99. Bull market szn is back, baby 😤That's all for today, have a great weekend!

Forecasts powered by Kalshi As always, these market forecasts are powered by Kalshi, the first regulated prediction market in the US. Trust data, not pundits, and get your forecasts from people with real skin in the game.