Fed Prioritizes Rising Inflation Over Recession Risks (Weekly Report)

Let’s begin this week’s report by talking about a recession. The Fed remains in a position where it can either fight inflation or cause a recession. This has not changed in the last year. Most economists saw it coming. What is becoming more apparent is the Fed’s strategy.

Key Drivers:

  • Ukraine Conflict
  • Rising Inflation & Recession Fears
  • Company Earnings
  • Wednesday, May 11 – Core CPI (MoM) (April)
  • Thursday, May 12 – PPI (MoM) (April)

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Last week, Jamie Dimon, CEO of JPMorgan Chase, stated that there is a 30% chance for a soft landing and a 70% chance for something else. I think we are heading toward “something else,” and it will be a HARD impact.

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Bill Dudely, former New York Fed President, said there is an “almost zero” chance that the Fed will avoid a recession. The Fed is choosing inflation to fight, at least for the moment, despite the growing risks of a recession. The TED measures the interest rates on T bonds and interbank loans. Since mid-April, it has seen a 15% increase. Previous spikes signaled the economic crisis in 2006-2008.

Last Wednesday, the Fed raised rates by 50 basis points, which is double what they had discussed a month ago. The Fed seems to be more concerned with tackling inflation than avoiding a recession. Specifically, Jay Powell, Federal Reserve Chairman, remains committed to fighting inflation by destroying demand.

Thus, I expect a recession followed by efforts to get the economy back on track once the worst has passed. The Fed knows it can’t save the economy and stop inflation. It is choosing to stop inflation.

Unfortunately, the Fed will not be able to counter certain inflationary pressures induced by supply chain scarcity. Powell said last week that there might be more upside surprises in inflation. Some people believe that year-over-2018 inflation will decrease due to base effects. We doubt it.

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This is a higher inflation rate in 2021 than the 2020 disinflation. However, month-over-month inflation will be the most important measure to monitor. Although year-over-2018 inflation decreases, month-over-month inflation can continue rising by 0.5-1.0%. This message of slower year-over-year inflation is likely to be repeated to counter the psychological side of inflation, which is self-reinforcing and will drive prices higher…much higher

The Fed’s inflation tricks shouldn’t fool you, and they are desperate to lower inflation expectations.

The supply chain situation is a disaster. We will feel the consequences of China’s decision to shut down large portions of its economy, including its ports. It is vital to source spare parts and electronics as soon as possible since once we feel the brunt of the Chinese lockdowns this month, many shelves will be emptying again.

We’ve already seen retailers reorganize shelves and displays to conceal significant gaps in product availability, which is likely to happen again.

Turning to the markets, they stagnated this week despite generally positive quarterly results, which was due to tightening US monetary policy and fears of economic repercussions.

Markets were expecting a rate increase, and the Fed confirmed it Wednesday. Quantitative tightening is a monthly decrease in the Fed’s balance sheet of approximately $47 billion per month, beginning in June and accelerating to $95 billion per month in September.

This curb on free money is hoped to help reduce inflation at its highest point across the Atlantic. It is possible to conclude that the Fed will likely continue its run of five 50-point rate increases before the end of this year.

For the most part, growth stocks are leading the decline, but everything as a whole is down. Some consumer defensive stocks like Coke are holding their own.

Many western indices have broken technical supports, which accelerated the week’s decline. Panic is already being felt.

Do we see the start of a selloff? Or is there bad news in the stock markets already? Another half-full, half-empty perspective.

One thing is certain is that the Fed is in control and they are prioritizing decreasing supply which will lead to an economic downturn. Investors should position themselves defensively for the next couple of years for the Fed to work stuff out.

BONDS

At this time, the trajectory of US monetary policy has been well incorporated into bond yields. The T-Bond 10-year pays 3.12%, an increase of 2.86% a week earlier. In Europe, the rise continues: The German Bund pays 1.11%, while the French OAT is 1.63%, and the British Gilt nearly 2% for a decade. The yield on Italian debt is 3.12%. As expected, the Bank of England raised rates on Thursday. The debate over the ECB is raging between those who believe it should do so quickly and those who worry about an economic exit.

CRYPTO

Market nervousness is evident for bitcoin, which is considered a risky asset in this economic downturn. The bitcoin price is dropping by more than 5% in the wake of major US indices, particularly the Nasdaq, which is closely correlated with it. It was now hovering at $36,000 when this article was written. Bitcoiners are facing a difficult time after six weeks of consecutive declines.

OIL

Despite opposition from some EU members like Hungary, the oil market is still full of buying excitement, supported by a possible Russian oil embargo in Europe. OPEC+ is sticking to its plan, which entails slightly increasing production. This decision was supported by many risks that are weighing down demand. The enlarged cartel will increase its supply by 432,000 barrels a day beginning in June. This target is unlikely to be achieved as OPEC+ is already having difficulty meeting its production quotas. Brent crude oil is currently trading at USD 110 per barrel, while WTI is around USD 109.

PRECIOUS METALS

It looks like another bearish weekly pattern for industrial metals. Prices are still sensitive to Chinese blockages. Concerns about the demand dynamics in the largest metals consumer in the world were reinforced by the April sharp contraction of China’s manufacturing PMI. Copper is now trading at USD 9540 and aluminum at USD 2916. Nickel is also falling at USD 30190/tonne. The prices for gold, despite the obvious rise in risk aversion, are still struggling to gain traction. The gold price is still below USD 1900 an ounce.

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