Despite strong macroeconomic indicators, the specter of an uncertain future weighs on investors’ minds as the central bank clamps down on rates, drawing liquidity out of the system. Eventually, the impact is on consumers in the real world.

The recently announced inflation numbers are higher than expected and have bucked the declining trend witnessed since April. Stagflation is now a real possibility. The European Central Bank (ECB) also appears to be ready to raise rates, despite having refused to do so just a few months back.
John Waldron, the President and Chief Operating Officer (COO) of Goldman Sachs, sharing Goldman’s plans to inorganically diversify its wealth and asset management businesses through M&A opportunities, cited the possibility of operating capital markets cycles being threatened by the current economic environment. He said, “this is among, if not the most complex, dynamic environment I’ve ever seen in my career. We’ve obviously been through lots of cycles, but the confluence of the number of shocks to the system, to me, is unprecedented.”

His statement seemed to echo the thoughts of Jamie Dimon, the CEO of JP Morgan, who had earlier said that the economy is in a “hurricane,” just up the road, “coming our way,” and that it was a minor hurricane or “Superstorm Sandy” was not yet clear.

KEY DRIVERS & CALENDAR

TIP – This is a brief bullet-point summary. It is a tool that gives investors and financial advisors a fast and simple list of what to news and market data watch that may move the markets.

• Ukraine Conflict (Ukraine Running Out of Ammo, Peace Agreement Possible?)
• Rising Inflation, Recession & Stagflation Fears
• Chinese Lockdowns Ending
• Wednesday, June 15 – FOMC Meeting Rate Hike
• Wednesday, June 15 – Retail Sales (MoM) (May)
• Thursday, June 16 – Building Permits (May)

Central bank policy formulation is extremely tricky under the dark clouds of high inflation. Macroeconomically speaking, this is going to be a busy week for the United States, with Tuesday being the day for producer prices and Wednesday for retail sales. Wednesday evening will also reveal the Fed’s monetary policy decision and rates. The Fed meeting will likely break or make the markets in the near term. On Thursday midday, the Bank of England will be joining the party with its announcements.

Domestic and global economic health predictions go southwards

The prospects of the economy remaining in a long spiral of heightened inflation have been flagged off by Janet Yellen, the Treasury Secretary. This was during a Senate Finance Committee hearing recently. The inflation forecast of 4.7% will likely be modified upward by the White House once again.

The World Bank has pared its global growth forecast of 4.1% in January this year to a more modest 2.9% more recently. Its forecast for the US has followed a similar trajectory, paring down to 2.5% in GDP terms from 3.7% made earlier in the year. The trends of suppressed growth rates are not expected to change in the next two years, with 2.2% being the likely growth number. While recessionary concerns may not be realized, stagflation, which could linger for several years, definitely is a concern.

David Malpass, President of the World Bank, says, “The danger of stagflation is considerable today. Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi-decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer.”

Despite the dire predictions of the World Bank, supply chain pressures, backlogs of orders, and negative market sentiment in the US, Yellen believes that the economy is at the stage of moving from the current state of recovery to “stable and steady” growth.

It also appears that she is now beginning to apportion blame for the economic situation to factors that the government cannot control and that the US is not unique in experiencing inflationary pressures, as she did in her recent appearance before the Senate Finance Committee. According to her, prolonged supply disruption was the primary contributor to the increased inflation, not the “American Rescue Plan.” She also sought to allay fears about the government’s capacity to service its debt obligations over the next decade and said it was “completely manageable.”

Consumers believe they are in a recession

The Economist recently conducted a survey revealing that more than 50% of Americans believe the nation is in the throes of active inflation. Evaluated down party lines, while almost half of Democrats believe this to be the case, amongst Republicans, the inflation believers are an overwhelming majority.

These views seem to be driven by an underperforming stock market and prolonged inflationary conditions, leading to increasing the monthly budgetary hole for the average Joe since growth trends and jobs data projections reveal relatively strong results.

There has been an increase of $569 in the monthly cost of living since January 2021, as measured by the Joint Economic Committee (JEC) in April 2022. According to the JEC, “Even if prices stop increasing altogether [implying an inflation rate of zero], the inflation that has already occurred will cost the average American household $6,829 over the next twelve months.”

Will home prices track lumber and fall?

From a high of $1,544.50 that it scaled in May 2021, lumber was down to $1,329 in January 2022. Prices have continued to fall and are now at $600 per thousand board feet, close to the prices prevailing in 2020.

Though lumber continues to be in short supply, pricing spikes are generally driven by the countrywide supply of incomplete homes as an overwhelmingly large proportion of homes built in the US are framed in wood. Moody’s Analytics estimates that number to be in the range of 1.5 million.

If experts from the National Association of Home Builders (NAHB) are to be believed, a de-escalation is expected in the housing market, which should be good news for those looking to buy. The United States continues to depend on supplies of lumber from Canada, and if orders can be fulfilled, prices of lumber in the local market are likely to come down.
Prices of lumber notwithstanding, the sharp increase in mortgage rates has made housing less affordable. In the first week of June, the average rates for a 30-year fixed-rate mortgage, the most popular financing option for buyers, stood at 5.09%, significantly higher than the 3.11% at the start of this year and only slightly under the peak of 5.3% it touched last month.

Hence, even if prices of lumber continue to fall, the winners will be people buying homes in cash and not through a mortgage loan. Of course, a drastic fall in home prices and/or a sharp reduction in mortgage lending rates could also aid first-time home buyers.

On the other side of the Atlantic, the ECB, reacting to inflationary concerns, seems to be hardening its stance on rates. This has led to an escalation in interest rates on sovereign debt, with, expectedly, the riskier profiles rising faster.

TRUFLATION UPDATE

Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.

BONDS

At the start of last week, US rates appeared to be retreating, as investors expected the Fed to ease its stance in the face of worse economic data. However, they rapidly recovered, and the 10-year maturity now pays roughly 2.98 percent, up from 2.73 percent at the end of the previous week. Meanwhile, central bankers Loretta Mester and Lael Brainard have stated that interest rates may need to be lifted again in September. The week in Europe was also marked by a dramatic increase in interest rates.

CRUDE OIL

This week, oil prices have been on a roller coaster again. The European Union’s member countries have finally agreed on a ban on Russian oil. However, it is a restricted ban, as it only applies to marine imports. Pipelines are not targeted, which is a compromise that will buy time to address the concerns of Central European countries’ reliance on Russian oil. Parallel to this, OPEC+ opted to increase production slightly more than planned in July and August during a meeting this week (648 million barrels per day more, instead of 432 million more than in the previous months). However, with most members straining to fulfill their production requirements, it’s hard to envision OPEC+ output rising considerably in the coming months, especially if Russian output falls. Brent is currently trading near USD 118 per barrel, while WTI, the US benchmark, is trading near USD 117.

PRECIOUS METALS

China’s metals prices continue to swing back and forth. Beijing has lifted the cost of metals that are particularly susceptible to this issue, such as nickel and tin, by announcing a new support scheme for renewable energy. In London, the latter is trading at USD 27710 and USD 35250, respectively. Copper has also increased in price, reaching USD 9455 per metric ton. Gold and silver are fighting to recover in the precious metals market, selling at USD 1862 and USD 22.2.

CRYPTOCURRENCY

Bitcoin was about to halt a nine-week loss, and then it crashed like a bag of rocks over the weekend. What seems unclear is the reason for the drop. Some have speculated that it is a victim of investors selling off riskier investments due to high inflation and others have pointed to pending rule changes on crypto. What we do know is that crypto as a whole right is doing a straight dive. In the past we have seen the support of around $30K, however, we do not see a current support level.