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.

Consumer Sentiment Remains Very Depressed (University of Michigan Sentiment Index Rises Slightly To A Depressed 51.5 While Buying Conditions For Housing Rose Slightly To A Depressed 47.0)

“A recession is two quarters in a row of negative growth.” — President Clinton, Dec. 19, 2000

My former colleague at Deutsche Bank, Joe Carson, said recently that the US economy is not in a recession, but corporate profits are in a recession. While I cling to the traditional definition of recession (two consecutive quarters of negative real GDP growth), there is another component of the US economy that is in recession: consumer sentiment.

The University of Michigan Consumer Sentiment Index rose slightly in the latest release, but remains depressed at 51.5. University of Michigan Buying Conditions for House also rose to 47.0, also a depressed reading.

While unemployment remains low, the price of gasoline is crushing the wallets of American households helping to cause a recession in consumer sentiment.

Biden feebly attempts to explain why 2 consecutive quarters of negative real GDP growth (better known as contraction) is NOT a recession.

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.

Inflation And The Fed Ahead of Wednesday’s FOMC Meeting (Will Fed 75 BPS Increase Tame Inflation With Inverted Yield Curve? Or Will Biden/Congress Raise Taxes To Fight Inflation?)

Hold on, The Fed is coming! To raise their target rate by 75 basis points at Wednesday’s FOMC meeting. Will this stem the tide of rising inflation?

Under Biden, we have seen regular gasoline prices rise 82% despite recent declines. Diesel fuel is up 121% and foodstuffs are up 46%. And house rents keep rising at a staggering 14.75% YoY. The recent declines is more due to the global economic slowdown and central bank rate increases than anything Washington DC is doing.

(Bloomberg) Investors are skeptical that the Federal Reserve can tame the worst inflation in four decades without driving the economy into a recession.

That’s bad news for Americans, who face the prospect of a downturn as their bills for food, rent and fuel swell. But to bond investors hit by deep losses this year, it may mean any further pain will be short-lived, as a recession will spark the US central bank to cut rates next year. That’s according to the results of the latest MLIV Pulse survey.

Over 60% of 1,343 respondents in the survey said there’s a low or zero probability that the US central bank can rein in consumer-price pressures without causing an economic contraction. The survey was conducted July 18-22 and included retail and professional investors.

US inflation may be close to a peak, but it’s very likely to stay above 8% through year-end. Bloomberg Economics’ model assigns zero probability to a drop below 4% in 2023. Taken together with increasing recession risks, the Fed faces a tough balancing act as it attempts to bring stubborn price pressures under control without tipping the economy into contraction.

Of course, The Federal Reserve doesn’t really consider energy or food inflation, which are typically higher than core inflation. But going into Wednesday’s meeting, we see the US Treasury 10Y-2Y curve remains inverted (a signal of impending recession) and the Atlanta Fed GDPNow Q2 tracker at -1.6% after a negative Q1 reading.

Will raising the target rate (or ACTUALLY shrinking their balance sheet) reduce inflation? We shall see, but it has got to be better than Lawrence Summer’s suggestion to reduce inflation: raise taxes. Wait a minute, Larry. Inflation was caused by 1) overstimulus by The Fed combined with 2) massive Covid spending by Biden, Pelosi, Schumer and 3) Biden’s anti-fossil fuel policies. So instead of suggesting a decrease in Federal spending, Summer’s wants to give MORE of your money to Biden and Congress to spend. What an unbelievable nitwit.

Here is a picture of Larry Summers, Jay Powell and Janet Yellen attending the FOMC meeting in Washington DC.

Goin’ Down! US Housing Starts Drop -6.3% YoY In June Thanks To Fed Tightening (1-Unit Starts Dropped -8% MoM, Multifamily Starts Soared 15% MoM)

The US is goin’ down. At least in terms of housing supply growth.

The US is short on supply of housing for a myriad of reasons (high costs, Not-in-my-backyard (NIMBY) local zoning laws, etc), but The Fed’s cranking up interest rates isn’t helping.

US housing starts, a measure of supply, declined -6.3% YoY in June as The Fed cranked up rates.

1-unit (aka, single family detached) starts dropped -8.05% MoM in June while 5+ unit (aka, multifamily) starts rose 15% MoM.

1-unit permits dropped -8% MoM in June while 5+ unit starts were up 13% MoM.

The reason? REAL weekly earnings growth declined -4.4% YoY in June thanks to Bidenflation.

I hope you are enjoying Biden’s anti-fossil fuel agenda since it is killing us.

Biden’s Limbo Rock! US Consumer Confidence Remains Depressed 51.1 With Inflation Ravaging Households, Housing Sentiment Even Worse At 45 (Biden Approval At 38.1%)

How low will consumer sentiment (and Biden’s approval ratings) go? This is Biden’s limbo rock.

One measure of how bad things are in the US for the middle-class and low-wager workers ix consumer sentiment from University of Michigan. The latest University of Michigan survey of consumers remains depressed at 51.1.

The consumer sentiment index was at 80.7 at the beginning of 2021, but has plunged dramatically with rising gasoline, food and inflation in general. Biden’s popularity has sunk from 55.8 in January 2021 to 38.1 today.

How about housing sentiment? Housing sentiment was 134.0 in January 2021 but has plunged to a depressing 45 with inflation and rising home prices (and rent). And with declining sentiment about housing, Biden’s popularity has plunged.

Yes, this is Biden’s limbo rock. How low will his popularity go?

The Core? Flexible Price Inflation Rises To 18.74% While Core Inflation Plunges To 8.40%, “Fats” Waller Backing 75 Basis Point Hike (30Y Mortgage Rate Rises To 5.83%)

As Americans are painfully aware, inflation is the highest in 40 years prompting The Federal Reserve to remove the massive punch bowl. In fact, Federal Reserve Governor Christopher “Fats” Waller backed raising rates by 75 basis points this month.

How hot was the recent inflation report? The Atlanta Fed’s flexible price index rose to 18.74% YoY. On the other hand, the CORE flexible price index (less energy and food) plunged to 8.46% YoY. The 30-year mortgage rate from Bankrate rose slightly to 5.83% as the implied overnight rate for the July FOMC meeting rose to 3.45%.

Inflation is ravaging consumers with the savings rate falling by -46.3% YoY while consumer credit rose 7.3% YoY. Yes, thanks to high inflation, consumers are saving less and borrowing more.

When even CORE flexible price inflation is 8.40% YoY, you know that The Fed and Federal government have made serious policy errors.