Doom Loop? The US Dollar Is Booming, But Will A Doom Loop Follow? (US Treasury Yield Curve Inverted At -20 BPS)

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.

Buckaroo! Why The Fed Won’t Be Able To Contain Inflation (Taylor Rule Suggests A Target Rate Of 23.30%, A Bridge Too Far)

The Federal Reserve has behaved like buckaroos! Why? Since the financial crisis, The Fed has left its enormous monetary stimulus outstanding for too long.

The Fed initiated asset purchases in a series of moves (aka, QE) culminating in Covid QE that has been barley removed. With The Fed’s stimulypto (and Federal spending), we have seen the S&P 500 index soar along with home prices.

Of course, this begs the question as to whether the stock market and housing market can withstand The Fed’s tightening plans.

A closer look at the S&P 500 index and the Case-Shiller National home price index under Biden. The S&P 500 has been declining since The Fed started their monetary tightening. But the Case-Shiller National home price index as of April ’22 was still soaring.

With inflation at a 40-year high, the Taylor Rule suggests a Fed target rate of … 23.30%. It is currently at 1.75%. That is an unrealistic target rate that The Fed will never do. It is, in fact, a Bridge Too Far.

How about the Taylor Rule using Core PCE? It is still 12.71%. Still a bridge too far!

Markets are conditioned to massive Fed stimulypto, so how will markets react to stimulus reduction?

While The Fed is intent on withdrawing SOME of the enormous monetary stimulus, they are still buckaroos. And Biden/Congress still want to distort markets by Federal spending such as the Build Back (Inflation) Better bill that Manchin has blocked … so far.

Soothe Me? US Q2 Real GDP Sinks To -1.5% As Fed Tightens The Monetary Noose

The Federal Reserve isn’t soothing me with their rate hikes.

As The Fed has been raising their target rate and beginning to shrink their balance sheet, we are seeing Q3 Real GDP slipping further down the rabbit hole to -1.5%.

The culprit? Friday’s retail trade, import/export prices and industrial production.

Time for some tequila to soothe me, since The Fed or the Biden Administration won’t help.

Simply Unaffordable? Or Is The Fed Killing-off Housing In Its Quest To Crush Inflation? (REAL Home Price Growth Is 12% YoY While REAL Wage Growth Is -3.95% YoY)

Housing in the US is simply unaffordable for the middle class and low-wage workers. Combine rising food costs and gasoline/heating costs, and we have an economic disaster on our hands.

US existing home sales for June will be released on Wednesday. But can The Fed kill-off home price inflation?

A preliminary analysis of existing home sales for June is for a seasonally adjusted annual rate of 5.1 million, down 5.4% from May and down 14.2% from last June. As The Fed cranks up its target rate (green line) and eventually shrinking its balance sheet, we will see further shrinking of existing home sales this summer.

But home price inflation remains high (Case-Shiller National home price index at 21.23% YoY, Zillow’s rent index at 14.75% YoY) while the Consumer Price Index YoY is at 40-year high of 9.1% YoY. In other words, home price inflation is 233% of the stated inflation rate from Uncle Sam.

May’s existing home sales report was … sobering. There is still historically low levels of available inventory and median sales price of existing home sales was 14.64% YoY. Of course, the alternative to ownership is renting which is growing at 14.75% YoY. Simply unaffordable.

The gap between REAL home price growth (12.13% YoY) and REAL average hourly earnings (-3.95% YoY).

Consumer sentiment for housing is near the lowest level since 1982.

The Fed seems determined to remove the punch bowl in its efforts to crush inflation. But will The Fed’s efforts also crush the housing and mortgage market?

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.

Bottle Of Wine? Strong US Dollar And Soaring Inflation Is A Brutal Cocktail For S&P 500 Firms (Will The Fed Pivot To QE Again?)

The US Dollar keeps strengthening as inflation skyrockets. Good news?

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.

But will The Fed pivot?

The Biden Cocktail. A fine wine turned to vinegar.

Fed Fireball? US PPI Final Demand UP +11.3% YoY As Fed May Raise Rates 100 Basis Points At July 27th FOMC Meeting (Stocks In A Sea of Red)

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.

Update! Dow down over 500 points this AM.

Let’s Get Ready To Stumble! Bank Of America Predicts 4 Straight Quarters Of Negative Real GDP Growth

Let’s get ready to stumble!

Bank of America is predicting 4 straight quarters of negative real GDP growth.

2022 is shaping up for a bad year.

The Great Divide … In Affordability! REAL Rents Rising At 6.16% YoY As REAL Hourly Earnings Declining At -3.47% YoY (Growing Homelessness And Rise In Home Sale Cancelled Transactions)

We are across the great divide! In terms of house prices and affordability.

We are all aware that inflation is soaring, since the Covid outbreak in 2020 and the massive overaction by The Federal Reserve and Federal government in terms of stimulus spending and economic lockdowns.

Things were “normal” before Covid in that REAL housing rent (white line) and REAL average hourly earnings YoY (yellow line) moved together. But after Covid shutdowns and Federal stimulus “relief” (orange line), we see that inflation (blue line) took off along with the growth in housing rent. The problem, of course, is that REAL average hourly earnings YoY has been declining. I call this “The Great Divide in housing affordability”.

The question, of course, is whether The Federal Reserve will continue their “war on inflation” with a 75 basis point rate increase.

Inflation is at its fastest pace in 40 years, and is expected to increase even higher in tomorrow’s inflation report.

Gasoline prices have been dropping recently, but remain above $4.50 per gallon (regular gas price was $2.40 per gallon on Biden’s inauguration day. And no, it wasn’t the Biden Administration selling nearly 1 million barrels of crude oil from the strategic petroleum reserve to the Chinese government-owned Sinopec that Biden’s son Hunter is an investor (so, The Big Guy aka Joe Biden gets a 10% piece of the action). It is a slowing global economy that is helping to lower gasoline prices.

Between soaring gasoline prices and soaring home rents, it is little wonder that there is a serious homeless problem in places like New York and California.

With rising mortgage rates, we are seeing a surge in pending home sales cancellations.

Atlanta Fed’s Raphael Bostic thinks that the US economy is so strong that it can easily handle a 75 basis point increase at the next FOMC meeting. Fortunately, he is not a voting member.

I wonder if Joe Biden sings “Carry On My Wayward Son” to Hunter?

Money! About That June Jobs Report (The Fed’s Balance Sheet Still Out In Force!)

The Federal Reserve’s policies remind me of the Cabaret tune “Money.” There is still almost $9 trillion in monetary stimulus outstanding.

For all the economic cheerleaders out there like CNBC about the June job report, they generally ignore what is driving the jobs report: The Federal Reserve!

Take the US U-3 unemployment rate. The Biden Administration is proud of the unemployment rate of 3.6%. But if you look at the chart of unemployment relative to The Fed’s balance sheet expansion due to Covid lockdowns, there is still almost $9 trillion of Fed stimulus outstanding.

Of course, the lockdowns were pure economy killers, so opening the economies again led to the unemployment rate falling to 3.6% which is still higher than before the Covid outbreak. But The Federal Reserve has been painfully slow at shrinking its balance sheet, leaving almost $9 trillion in monetary stimulus outstanding.

Take average hourly earnings growth. The media is all smiles as US wage growth declined to 5.1%, much higher than pre-Covid.

Then we have inflation, at 40-years highs thanks to massive Fed stimulus (and Federal spending).

And if we deduct inflation from average hourly wage growth, we see REAL wage growth declining at a -3.25% YoY clip.

Lastly, we have the US Dollar. Nothing has been the same since the financial crisis of 2008 and the entrance of The Federal Reserve distorting the economy and prices. Not to mention the US Dollar.

The Fed leaving its monetary stimulus out in force for so long is a major policy error. So what happens when The Fed actually gets serious about withdrawing the monetary stimulus (likely after the midterm elections)?