• The market is still pricing a 75 bps rate hike in July and a strong possibility of one in September as well.
  • The Fed’s guidance sent the fed funds shadow rate to 3.3%. The US monetary policy has tightened well before the bulk of the upcoming rate hikes.
  • The FOMC members are highly uncertain about their economic forecasts and see significant upside risks to inflation and unemployment.

In the first session of a two-day testimony on Capitol Hill, Fed Chair Jerome Powell emphasized that the central bank plans to keep raising interest rates until it sees clear proof that inflation is slowing, even if that means causing a recession. “It’s not our intended outcome at all, but it’s certainly a possibility,” he told the Senate Banking Committee. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to bring down price pressures. Stocks edged lower following the testimony, while U.S. equity index futures wavered between gains and losses overnight.

“The events of the last few months around the world have made it more difficult for us to achieve what we want,” Powell continued. “We’ve never said it was going to be easy or straightforward.” The messaging is a notable departure from his stance on March 2, when Powell stated it is “more likely than not that we can achieve what we call a soft landing.” The Fed has already raised rates three times since then, and most recently upped the federal-funds benchmark by 75 basis points in the largest hike since 1994.

  • The Fed has little choice but to tighten aggressively, but that means German rates can’t remain at zero.
  • European rates have been kept artificially low in order to keep over indebted countries like Italy solvent.
  • Raising rates would send those economies into a death spiral but not raising rates would collapse the euro and make inflation rocket higher.
  • Issuing swap lines to the ECB would effectively mean Germany is guaranteeing French, Spanish and Italian debt, something the German constitution forbids.
  • The ECB is trapped until the Fed stops tightening.

This ugly liquidity crisis will likely get uglier, but its resolution will also mean a buying opportunity. Those who took advantage of similar situations in the past made out like bandits. But doing so will require extraordinary patience.

 

US Economy

 

  • We continue to see evidence of slowing economic growth in the US. The Conference Board’s index of leading indicators was down for three months in a row.

 

 

  • To be sure, factories remained busy in May, but these could be the first “hard data” signs of a slowdown in manufacturing activity.
  • Vehicle production has been rebounding (replenishing inventories).
  • Economic surprise indicators are down sharply.

 

 

  • The 10yr – 2yr Treasury spread is flirting with inversion.
  • The World Economics SMI report indicates that US business activity is already in contraction mode (SMI < 50). It appears that companies are now shedding jobs .

 

 

  • Startups continue to lay off workers as VCs warn about the looming “funding winter.”
  • West Coast port delays continue to ease, …

 

Source: Wells Fargo Securities

… as inventories surge, slowing demand.

 

 

  • The NY Fed’s national consumer survey suggests that household credit availability is worsening.
  • Existing home sales were in line with forecasts, dipping to 2015 levels.
  • Sales are down almost 9% from a year ago.
  • And there is more pain on the way.

 

 

  • Housing inventories remain exceptionally tight but are starting to move higher.
  • Price gains have slowed but remain positive.
  • Mortgage payments (based on the median asking price) keep climbing, putting further pressure on affordability.

 

 

  • More sellers are lowering listing prices.
  • Redfin’s housing demand index continues to move lower but is not crashing.
  • Residential construction activity could slow substantially, prompting analysts to downgrade homebuilder share price targets.

 

 

  • Single-family rents are about 14% higher than last year, with gains remaining broadly based.

 

 

  • There has been some focus in the media on the recent increase in revolving credit (credit card debt)

 

 

  • especially as credit card rates surge.

 

 

  • In another sign of slowing consumer demand, full-service restaurants are seeing a pullback in foot traffic.

 

 

  • Apparel store foot traffic is lower as well.

 

 

  • How many weeks of income does it take to purchase a new vehicle?

 

 

  • Real card spending growth is now negative.
  • Further weakness in retail sales could spell trouble for GDP growth.

 

Market Data

 

  • Copper has been selling off …

 

 

  • The breadth of the recent selloff has been unparalleled.

 

 

  • The Dow has been in the red in 11 out of 12 past weeks (a record).
  • Stocks are expensive relative to bonds.
  • The percentage of investors who are bearish is near the highest levels since the financial crisis.

 

Quote of the Week

 

“Work hard.  You got this!”

 

Picture of the Week

 

Economies ranked by projected GDP:

 

 

 

 

All content is the opinion of Brian J. Decker