Copper, one of the economic measures of a growing economy, is down -27% since March 3, 2022 as recession looks more likely.
Let’s compare copper with another famous asset, Bitcoin. Bitcoin, a cryptocurrency, is down 70% since November 9, 2021.
As I discussed yesterday, The Fed’s five-year forward breakeven inflation rate has plunged to its lowest levels under Biden as the global economy is slowing.
Notice that copper prices fit pretty well with The Fed’s 5-year breakeven inflation rate.
It looks like The Fed is killing-off the economy in their quest to tame inflation.
US inflation is the highest in 40 years, yet inflation may be slowing as 1) The Fed cranks up interest rates and 2) the global economy is slowing.
US inflation data in the coming week may stiffen the resolve of Federal Reserve policy makers to proceed with another big boost in interest rates later this month.
The closely watched consumer price index probably rose nearly 9% in June from a year earlier, a fresh four-decade high. Compared with May, the CPI is seen rising 1.1%, marking the third month in four with an increase of at least 1%.
While persistently high and broad-based inflation is seen persuading Fed officials to raise their benchmark rate 75 basis points for a second consecutive meeting on July 27, recession concerns are mounting. There are signs, though, that price pressures at the producer level are stabilizing as commodities costs — including energy — retreat.
But the expectations of inflation, as measured by The Fed’s 5-year forward breakeven inflation rate, just crashed to 1.8437%.
The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.
The USD Inflation Swap Forward 5Y5Y is also falling like a rock as The Fed hikes their target rate (green line).
Could it be that inflation is cooling with Fed rate hikes (but not the shrinking of their $8 trillion balance sheet)?
Currently, Fed Funds Futures are pointing to a Fed target rate of 3.552% by February 2023. And with that, Bankrate’s 30-year mortgage rate rose to 5.75%. Once again, like velociraptors from Jurassic Park, The Fed’s balance sheet is still out in force.
Fed Chair Jerome Powell and Atlanta Fed President Raphael Bostic are keeping The Fed’s balance sheet at near $9 trillion as they hunt assets to inflate.
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)?
Well, this is one way to get inflation under control … crash the economy. And inflation fears growing, we are seeing mortgage rates declining and mortgage applications increasing.
Mortgage applications decreased 5.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 1, 2022. This week’s results include a holiday adjustment to account for early closings the Friday before Independence Day.
The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The unadjusted Purchase Index increased 7 percent compared with the previous week and was 17 percent lower than the same week one year ago.
The Refinance Index decreased 8 percent from the previous week and was 78 percent lower than the same week one year ago.
TED refers to the difference between the three-month Treasury bill and the three-month LIBOR based in U.S. dollars, a measure of fear in the market.
The 3-month TED spread is rising awfully fast. A sign of impending recession.
US bank credit default swaps (CDS) are rising fast as inflation gets ugly.
The US Treasury 10Y-3M curve is bumping against the zero barrier.
I am still shaking my head at President Biden chastising gasoline stations for not lowering prices at the pump when refiners are near full capacity and the Biden Administration is doing nothing to increase the supply of US-source non-green energy.
Hey, I thought Mayor Pete Buttigieg, the US Transportation Secretary, was supposed to unclog the supply-chain crisis! Instead, we get heartaches on heartaches as diesel prices rise 118% under Biden AND now the bottle-necks may get a lot worse.
A US Supreme Court decision that could force California’s 70,000 truck owner-operators to stop driving is set to create another choke point in already-stressed West Coast logistics networks, a truckers’ organization said.
“Gasoline has been poured on the fire that is our ongoing supply-chain crisis,” the California Trucking Association said in a statement following the Supreme Court’s decision to deny a judicial review of a decision of a lower court, a process known as certiorari.
“In addition to the direct impact on California’s 70,000 owner-operators who have seven days to cease long-standing independent businesses, the impact of taking tens of thousands of truck drivers off the road will have devastating repercussions on an already fragile supply chain, increasing costs and worsening runaway inflation,” the CTA said.
The association asked the Supreme Court for a review of a case challenging California’s Assembly Bill 5, a law that sets out three tests to determine whether a worker is an employee entitled to job benefits or an independent contractor who isn’t. The trucking industry relies on contractors, and has fought to be exempt from state regulations for years because of federal law.
With few exceptions, the relationship between independent truckers and their carriers, brokers and shippers will be governed by the tests.
As if US consumers aren’t getting crushed by rising prices already. In response to the Covid outbreak, The Fed slammed its foot on the money accelerator along with Federal government stimulus. Throw in Biden’s anti-drilling executive orders, and we have a nightmare.
Consumer confidence is already crumbling under inflation and rising energy prices.
No, not the Claus von Bülow kind of reversal of fortune where has was accused of killing his wife. But this murder is coming from The Federal Reserve hiking interest rates even when they know that doing so could lead to a recession. And Biden’s anti-fossil fuel energy policies.
And investors in the Fed Funds Futures market see The Fed changing its rate-hiking ways in February 2023.
Inflation is what is killing the US economy and millions of households. Financially speaking.
And Biden’s approval ratings are sinking faster than The Titanic. In other words, he’s just killing us.
And then we have turbulence in the housing market as Fed intentions are driving up mortgage rate which helped listings with price reductions at 98.2% YoY.
Biden’s energy policies plus The Fed’s war on inflation will result in an economic reversal of fortune.
The US economy is slowing as inflation ravages consumers. US Regular Gasoline prices, for example, are up 104% under President Biden which helps to slow the economy.
US personal consumption expenditures fell to +0.2% MoM in May as “inflation” or real personal consumption expenditures PRICES rose +6.3% YoY as The Fed’s balance sheet (aka, Master Blaster!) remains.
As I mentioned above, US regular gasoline prices are UP 103% under President Biden, diesel prices (the cost of shipping goods to markets like … food is up 119% under Biden while CRB foodstuffs is up 55% under China Joe.
Now we have mortgage rates in the US falling for the first time in four weeks. The average for a 30-year loan was 5.7%, down from 5.81% last week, Freddie Mac said in a statement Thursday.
This year’s Fourth of July celebration is going to cost 18% more than last year’s celebration.
Lastly, the Atlanta Fed GDPNow real time tracker for Q2 is showing … -1% GDP “growth.”
Financial markets are anticipating what Mester is saying: rapidly rising interest rates. But as you can see from the following chart, gasoline prices (orange line) are driving rising US prices. So it is doubtful that monetary tightening will slow price increases. But Mester and company can only control monetary stimulus.
Mortgage rates have soared as The Fed attempts to crush inflation. And mortgage purchase applications fell -21% WoW in the most recent Mortgage Bankers Association survey.
The Refinance Index increased 2 percent from the previous week and was 80 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 0.1 percent from one week earlier. The unadjusted Purchase Index decreased 21 percent compared with the previous week and was 24 percent lower than the same week one year ago.
It almost seems like Mester is following the Taylor Rule (not really). But using CPI YoY, the Taylor Rule is saying that The Fed Funds Target Rate should be … 22.10%. It is only 1.75% after years of excessive stimulus following the banking crisis of 2008/2009. And Yellen who seemingly never met a rate hike that she liked.
If we use core PCE as our measure of inflation, the Taylor Rule is still high at 13.25%, a whopping 11.50 spread over the current target rate.
Confounded Interest - Anthony B. Sanders 
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