Somehow I doubt if Biden, Harris and Jean-Pierre (Biden’s Press Secretary) will go on the talk show circuit talking about the Producer Price Index Final Demand at 9.8% YoY, meaning that inflation is still raging.
But the curious thing about the PPI Final Demand numbers. While lower than June’s reading of 11.3% YoY, it also coincides with declining gasoline prices and declining growth in M2 Money stock. Which is still growing at 5.9% YoY. The probability of recession is rising (even though technically the US is in recession after 2 consecutive quarters of negative GDP growth.
Here is the more striking chart.
So is the US “improving” on prices because of brilliant Biden strategies (I just laughed at my own “bon mot”)? Or are prices (PPI, gasoline) slowing because of declining demand as the US slips into recession?
Lawrence Summers was once again in the news saying that the way to cool inflation is to raises taxes (and cool demand). Only a true Statist would say something like that. Larry, how about Biden and Congress stop spending so much money that is helping to fuel inflation?
One Washington DC types would rest their hopes on cooling inflation by having the US slip into recession AND raises taxes.
Today’s jobs report was … strange. While the US economy added more jobs than expected, we also saw labor force participation contract and real wage growth decline again.
The reaction in the bond market? US Treasury 10-year yields exploded by +14 basis points. As I used to tell my fixed-income students, any basis point jump or decline of 10 basis points or more is a BIG DEAL.
The implied target rate for The Fed (based on Fed Funds Futures) is now lower for the Jan 1, 2024 FOMC meeting (3.025%) than it is for the Sept 21, 2022 FOMC meeting (3.034%).
Mortgage rates? They will go up as The Fed removes its Brawndo, the economy mutilator.
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.
“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.
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.
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.
As The Fed Reserve prepares to raise their target rate in a week by 75 basis points to 2.50%, the NAHB Home Builder’s confidence index plunged.
The 30-year mortgage rate is up 89% under Biden as his green energy fiasco is helping drive inflation to its highest level in 40 years leading The Fed to tighten its monetary policies.
The dollar’s gain is the world’s pain — and based on its current trajectory, the world may be in for a whole lot more discomfort.
Concerns over global growth have recently sent the US Dollar Index to the strongest level on record, with the greenback hitting multi-decade highs against currencies like the euro and the yen.
But the move risks becoming a self-reinforcing feedback loop given that the vast majority of cross-border trade is still denominated in dollars, and a stronger US currency has historically translated into a broad hit to the world economy.
Against the backdrop of higher-than-expected inflation and still-elevated commodities prices, the concern is that we’re in for a dollar ‘doom loop’ like never before, according to Jon Turek, the founder of JST Advisors and author of the Cheap Convexity blog.
With the Federal Reserve hiking interest rates at the fastest pace in decades, he says, it’s much less clear what could break the feedback loop in the next few months.
The Dollar Doom Loop with US inflation causing The Fed to tighten
Under Biden’s policies, inflation hit a 40-year high (blue line), and the US Dollar (green line) is strengthening. Then we have The Fed raising the target rate (purple line) and the probability of recession rising with Fed tightening.
Is a US recession coming? The US Treasury 10Y-2Y yield curve is inverted at almost -20 basis points.
There is a Fed open market committee meeting in one week and they are expected to raise their target rate by 75 basis points according to Fed Fund Futures data. Inflation keeps rising as does the probability of a US recession. So, The Fed will keep on tightening.
Bear in mind that a strong dollar is a two-edged sword. The US Dollar Index has risen 16% year-over-year, presenting a big hurdle for US firms with business overseas.
That strength of the greenback will rise until the Fed makes a dovish policy pivot.
And that pivot is forecast to occur at the Feb ’23 FOMC meeting.
Face it. The Biden Administration has little interest in trying to increase the supply fossil fuel energy which would anger his “green” base (like building more refineries or allowing for more crude oil and natural gas exploration). So, the burden of “inflation fighting” falls on the frail shoulders of The Federal Reserve.
Given today’s US Producer Price Index Final Demand prices rising +11.3% YoY in June, it seems that The Fed has not been able to extinguish the “Tower of Inflation.” But, Fed Funds Futures are pointing to a near 100 basis point (or 1%) increase in The Fed Funds target rate at the July 27th Fed Open Market Committee (FOMC) meeting.
The Fed Funds Futures Data points to a +0.920 (almost 1%) increase at the July 27th FOMC meeting. Followed by rate cuts.
And with the fear of a near 100 basis point increase, today’s stock markets are a sea of red.
It is up to Fed Chair Jerome Powell and policy error brigade to extinguish price increases caused by 1) bad Biden energy policies and 2) too much spending by Biden and Congress. It is like trying to wave-down the Super Chief train with a cigarette lighter.
Yet, the Frail Fed will try to waive down The Super Chief inflation engine with Fed Fireballs. Aka, rate increases of 100 basis points.
Confounded Interest - Anthony B. Sanders 
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