Zoltan! Pozsar Says L-Shaped Recession Is Needed to Conquer Inflation (US 10Y-2Y Curve Inverts To -31.69 BPS)

Fed may have to hike to 5% or 6% as inflation now structural

The US economy may need to undergo a deeper and longer recession than investors currently anticipate before inflation can be brought under control, according to Zoltan Pozsar of Credit Suisse Group AG.

Markets expect the surge in consumer prices will soon peak and central banks will become less hawkish, but there’s a high risk that global cost pressures will remain elevated, Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note.

The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe, he said.

Markets priced for inflation to come back down very fast

“War is inflationary,” Pozsar wrote. “Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.” That pattern held “until East-West relations soured, and supply snapped back,” he said.

The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic, Pozsar said.

There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.

‘More Misguided’

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Pozsar’s warning that inflation will stay elevated puts him at odds with the Treasury market, which rallied last month as investors switched their focus to recession risks from inflation concern. While an economic slowdown typically weighs on consumer prices, the latest annual US inflation reading of 9.1% for June remains far above the Fed’s 2% goal, although the price surge is forecast to slow for the first time in three months to 8.8% in July according to a Bloomberg poll of economists.

The bond market is more misguided now than at any other time this year as traders wager the US central bank will start cutting rates in early 2023, Bloomberg Economics’ chief US economist Anna Wong and her colleagues said this week. Money markets are wagering on almost one percentage point of hikes by year-end followed by a quarter-point cut by June.

“Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”

Speaking of “recession,” the US Treasury 10Y-2Y yield curve has inverted even further to -31.69 BPS.

Zoltan!

Mr. Freeze! June JOLTs Job Openings Cool -5.4% From May, Home Price Growth Cools As Fed Tightens

Is Fed Chair Jerome Powell “Mr. Freeze?”

We are seeing a slowing of the US economy. For example, the JOLTs (job openings) numbers are out for June and they are down -5.5% from May. And from April to May, JOLTs declined -3.2% MoM. That is a clear slowing trend.

And on the housing front, the CoreLogic HPI Forecast indicates that home prices will increase on a month-over-month basis by 0.6% from June 2022 to July 2022 and on a year-over-year basis by 4.3% from June 2022 to June 2023. But rose +18.3% YoY in June. Also a clear cooling trend.

And its “Escape From Blue States” (perhaps a new Kurt Russell movie), with home prices rising fastest in red states (primarily The South). And contiguous migration from California to Nevada and Arizona.

The Fed Funds Futures market is pricing in rate hikes until the March 2023 FOMC meetings. After all, Prince Imhotep (aka, Minneapolis Fed’s Neel Kashkari) is screaming for more rate hikes to fight inflation … caused by 1) loose monetary policies since late 2008 and 2) insane Federal government spending.

Let’s see if “Mr. Freeze” (aka, Jerome Powell) relents on Fed rate increases before the March 2023 FOMC meeting.

Schumer/Manchin Bill With $327 Billion In New Taxes Could Cause Further Recession And Increase Taxes On Americans Making Under $400,000 (US 10Y-2Y Yield Curve Further Inverts)

The spendiholics in Washington DC (aka, Biden and Congress) have passed yet another inflationary legislation, this time the sadly misnamed “The Inflation Reduction Act” since it will likely lead to a furthering recession of the US economy. Well, that is one way to reduce inflation: cause a recession and job loss.

From the Wall Street Journal:

An analysis by the National Association of Manufacturers says the tax in 2023 alone will reduce real GDP by $68.5 billion and cut labor income by $17.1 billion. One well-known economic truth is that corporations don’t really pay taxes (they pass on taxes to consumers in the form of higher prices). They are essentially tax collectors, as the corporate tax rate ultimately falls on some combination of workers, shareholders and customers. Raise the corporate tax rate, and you’re cutting wages and salaries for workers.

From the NY Post:

“Americans are already experiencing the consequences of Democrats’ reckless economic policies. The mislabeled ‘Inflation Reduction Act’ will do nothing to bring the economy out of stagnation and recession, but it will raise billions of dollars in taxes on Americans making less than $400,000,” said Sen. Mike Crapo, an Idaho Republican who sits on the Senate Finance Committee as a ranking member, and who requested the analysis.

“The more this bill is analyzed by impartial experts, the more we can see Democrats are trying to sell the American people a bill of goods,” Crapo added.

According to Schumer and Manchin, “The Inflation Reduction Act of 2022 will make a historic down payment on deficit reduction to fight inflation, invest in domestic (green) energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030. The bill will also finally allow Medicare to negotiate for prescription drug prices and extend the expanded Affordable Care Act program for three years, through 2025.”

No wonder House Speaker Nancy Pelosi took her extensive entourage on a paid vacation to Singapore, Malaysia and perhaps Taiwan. Its called “Getting out of Dodge.” If Pelosi believed in this legislation, she could have “saved the environment” by simply doing a Zoom call. Then again, Biden’s Climate Envoy, John Kerry, still travels the globe trying to sell green energy and carbon reductions in his private carbon-spewing jet. But I forget, Biden, Pelosi, Schumer and Kerry are our elites who deserve platinum treatment, not lowly serfs like 99% of the US population.

So, here we go loop-de-loop. Politicians want to spend money on their friends and donors and then raise taxes on the rest of us.

On the recession front, the 10Y-2Y US Treasury yield curve just flattened another -6.015 basis points to an inverted -30.195 basis points.

Slowdown! US 30Y Mortgage Rate Declines To 5.28% Despite Fed Rate Hikes (Global Recession Alert!)

After breaking the 6% barrier back in June 2022, Bankrate’s 30-year mortgage rate has backed-off to 5.28% despite Federal Reserve rate hikes.

The reason for the decline in the US Treasury 10-year is, amongst other things, a global economic slowdown (partly due to the US and Europe “going green” and cutting the supply of fossil fuel-based energy). Instead of “The Great Reset,” I call it “The Great Economic Suicide.” The 10-year US Treasury yield and Bankrate’s 30-year mortgage rate are declining with declining global GDP.

We are apparently no longer allowed to say the word “recession,” so let’s call it a SLOWDOWN.

Alarm! US New Home Sales Plunge -17.4% YoY As Fed Tightens Noose And Recession Alarms Sound (Median Prices Fall -9.47% YoY)

Alarm!

US new home sales plunged -17.4% YoY and down -8.1% MoM in June.

The unsettling bit is the median price of new home sales declining -9.47% YoY.

The midwest was the big gainer in new home sales in June.

US Treasury Secretary Yellen Says Signs of US Recession Aren’t in Sight for Now (As Yield Curve And Atlanta Fed GDPNow Tracker SCREAM Recession)

Just remember, the US economy had strong employment figures just prior to the 2008 Great Recession and financial crisis, so US Treasury Secretary Yellen, Biden’s economic cheerleader Bernstein and Obama’s economic cheerleader Sperling are all relying on a bad indicator of economic health to justify that the US economy is in great shape.

(Bloomberg) — Treasury Secretary Janet Yellen expressed confidence in the Federal Reserve’s fight against inflation and said she doesn’t see any sign that the US economy is in a broad recession.

“We’re likely to see some slowing of job creation,” Yellen said on NBC’s “Meet the Press” on Sunday. “I don’t think that that’s a recession. A recession is broad-based weakness in the economy. We’re not seeing that now.”

With US consumer prices rising at the fastest rate in four decades, a growing number of analysts say it will take a recession and higher joblessness to ease price pressures significantly. The Federal Reserve raised rates in June by the most since 1994 and is expected to approve another 75 basis-point hike this week.

Inflation is “way too high,” Yellen said, while renewing the Biden administration’s argument that it’s also high in many other advanced economies.

“The Fed is charged with putting in place policies that will bring inflation down,” said Yellen, a former Fed chair. “And I expect them to be successful.”

Dammit, Janet. All of Biden’s anti-fossil fuel orders are still in place and Biden/Pelosi/Schumer are still trying to pass the highly-inflationary Build Back (Inflation) Better bill. And The Fed still has not shrunk it massive balance sheet yet.

But Janet, the US Treasury 10Y-2Y yield curve remains inverted (historically ahead of a recession) while the Atlanta Fed GDPNow Q2 tracker is at -1.6% which would make the second quarter in a row of negative real GDP growth in a row (historically a definition of recession).

My preferred 10Y-2Y chart shows the yield curve more inverted than even prior to The Great Recession!

But in Yellen’s defense, The Fed’s preferred yield curve (implied yield on 3-month T-Bills in 18 month – 3 month T-Bill yield) is still positive, though crashing like a paralyzed falcon.

So, the Biden administration is sticking to the strong labor market story. But what the Biden Administration (and Yellen) fail to acknowledge is 1) unemployment is a lagged indicator of a recession (unemployment was low prior to the 2008 GREAT recession, then exploded and 2) there is still a tremendous amount of monetary stimulus outstanding that The Fed has taken away … yet.

Essentially, the Biden Administration is panicking over the coming mid-year election and will say anything at this point to stay in power. So, I would probably ignore anything said by Biden, Yellen and their talking heads before the midterms elections. But when Biden’s economic advisor says that the US economy is strong, I want to ask him how having NEGATIVE wage growth is a good thing,

Let’s see if Yellen is correct and The Fed’s Fireball will tame inflation. Frankly, I think the global slowdown is the only thing that will tame inflation.

Recession Warning? Total US Foreclosures Starts UP 440.91% YoY In June (Black Knight)

This bit of housing news won’t soothe the Biden Administration which is terrified of getting blamed for a recession.

Total US foreclosure starts are up 440.91% YoY in June, according to Black Knight.

Rising mortgage rates, declining REAL wage growth? This spells trouble in River City (Potomac River city, that is!)

Welcome to the Land of a Thousand home foreclosures!

Grizzly Bear! US Existing Home Sales Crash -14.24% YoY In June As Fed Strangles Housing Market (Median Price 13.27% YoY As Inventory Still MIA)

Instead of The Boston Strangler, we now have the DC Strangler. Better known as The Federal Reserve and their war on inflation.

US existing home sales crashed -14.24% YoY and -5.40% MoM in June as The Fed tightens its icy grip on the housing market. Existing home sales were lower than expected at 5.12 million home sold SAAR.

Median price for existing home sales declined to 13.27% YoY as inventory available for sale remains MIA. And The Fed’s balance sheet is still out in force.

The US housing market in terms of sales has entered a bear market, but with The Fed’s balance sheet stimulus still hunting asset prices, it is a grizzly bear market in terms of affordability.

Heartaches By The Number! Mortgage Applications Declined For Third week In A Row, Lowest Level Since 2000 (Applications DOWN -71% Under Biden, Mortgage Rates UP 99%)

Heartaches by the number!

Mortgage applications declined for the third week in a row, reaching the lowest level since 2000.

Mortgage applications decreased 6.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 15, 2022.

The Refinance Index decreased 4 percent from the previous week and was 80 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 7 percent from one week earlier. The unadjusted Purchase Index increased 16 percent compared with the previous week and was 19 percent lower than the same week one year ago.

Heartache #1: Mortgage rates have risen 99% under Biden.

Heartache #2: Mortgage application have fallen -71% under Biden.

As The Federal Reserve continues to fight inflation caused by 1) excessive stimulus by The Federal Reserve and Federal government surrounding Covid and 2) Biden’s energy policies, we are seeing the mortgage market as collateral damage.

NOT Beautiful! US Mortgage Rates Decline Slightly To 5.73% As Fed Raises Rates And Recession Probability Increases (30Y Rate UP 99% Under Biden)

Everything is NOT beautiful for the mortgage market. In fact, the 30-year mortgage rate is up 99% since Biden took office as President.

Mortgage rates are rising in part thanks to The Federal Reserve trying to control inflation (caused by Biden’s energy policies and spending). But mortgage rates are down slightly today.

Bear in mind that REAL wage growth is negative, thanks to Bidenflation.

Joe Biden’s policies are a real heartbreaker for millions of Americans. And Jill Biden is the living, loving baby sitter.