Monthly Market Rollup: End of July 2024
The Fed holds rates flat for July, some inflation metrics show an increase in inflation is on the way, and the yield curve looks close to un-inverting. Where do things go from here?
Hello again, and welcome to our Monthly Market Rollup for the end of July 2024. We send these chart heavy market summaries at the beginning of each new month.
Please be aware that these notes are not investing advice and should be enjoyed as entertainment and for informational purposes only. Always do your own research. Sources can be found below each graphic.
As usual, we divide these monthly notes up into an Economy section currently focused on the potential for a Recession, an Inflation section, a Geopolitics section, and a Fed focused section along with a Conclusion. Enjoy!
Introduction:
It is the summer of 2024. After the fiscal stimulus response post-Covid by both the Trump and Biden administrations, Inflation has become a real concern for Americans after almost 50 years of being tamed.
And even four years on from the virus and the fiscal response, Inflation concerns have persisted, expressing themselves in the long of the US Treasury yield curve, and in the Fed Funds rate which sits higher than at any point than any since Q1 2001.
‘Fiscal dominance’, the idea that the fiscal spending side of the monetary vs. fiscal economic dance has taken the lead after multiple decades of monetary leadership, has taken root in the collective market brainstem and not let go.
The concern, that with no fiscal discipline in sight from Washington, has resulted in long term Treasury rates persisting at high levels. And even with the US Treasury moving funding issuance of Treasuries to the front end of the curve, Net Interest Payment to GDP has spiked to higher levels than ever seen in the history of the United States.
Source: https://x.com/TaviCosta/status/1815811402004627626
Accordingly, Central banks are rotating into Gold…
Source: https://x.com/KobeissiLetter/status/1798497945714860368
…and rotating out of treasuries:
Source: https://x.com/RonStoeferle/status/1813648390699508115
Luke Gromen put it well last year - there are only three ways out of our situation: A dramatic recession, a significant amount of inflation, or an economic miracle:
Source: https://x.com/LukeGromen/status/1626233335403126785
And with that let’s check in on the Economy.
Economy Watch:
We begin with the US Treasury yield curve. The yield curve has been inverted for longer than any other time in post war US history. And after this longest period of inversion ever, it appears that the Yield Curve is starting to un-invert with the overall number of curves that are inverted decreasing:
Source: https://x.com/TaviCosta/status/1816126473498960143
Under normal circumstances, this un-inverting does not end well for markets:
Source: https://x.com/i3_invest/status/1815839305837040059
For people who don't follow this very closely, last week we got within 9 bps of the 10-year vs 2-year un-inverting:
Source: https://fred.stlouisfed.org/series/T10Y2Y
Which almost always come with rising unemployment and a reversal in consumer expectations:
Source: https://x.com/topdowncharts/status/1811536011303809470
The length of time of this inversion would potentially correlate with a significant drawdown in equities:
Source: https://x.com/GameofTrades_/status/1816104725311545586
And as possible confirmation, numerous indicators are all showing a potential to drop into a Recession in the near term.
Trucking Employment is continuing to signal a downturn in private sector employment:
Source: https://x.com/GameofTrades_/status/1815401528707928345
Unemployment has increased above its 36 month moving average which has correctly indicated a recession numerous times in the past:
Source: https://x.com/GameofTrades_/status/1815376308618088812
The labor market appears to be weakening:
Source: https://x.com/GameofTrades_/status/1816826097365057901
Temporary Help services are dropping:
Source: https://x.com/Lvieweconomics/status/1809221476593086946
The Government is staunching the flow of the private sector decrease in job openings by (perhaps politically) searching for a large number of new hires:
Source: https://x.com/zerohedge/status/1818290660400619798
Businesses are nearing contraction levels of inventories:
Source: https://x.com/AndreasSteno/status/1816082156789075975
Multifamily Housing delinquencies have dramatically increased:
Source: https://x.com/GameofTrades_/status/1814267842277380519
And Credit Card defaults are rising:
Source: https://x.com/GameofTrades_/status/1815450380773548516
Inflation:
But even with the prospect of a deteriorating Economy, we are not out of the woods on Inflation.
Central Banks did not hike rates in June, which has not happened since 2020:
Source: https://x.com/SpecialSitsNews/status/1809247876712632354
Shipping rates are trending higher which correlates with US CPI:
Source: https://x.com/AndreasSteno/status/1816197761412301137
Which generally leads goods inflation:
Source: https://x.com/AndreasSteno/status/1811468279778508969
Geopolitics:
We’ve written previously about the need for dollar weakness, and in July it looks like we finally got some weakness after the odd strengthening in June.
Source: https://www.marketwatch.com/investing/index/dxy
This weakness coincided with Japanese Yen strengthening against the Dollar:
Source: https://x.com/AndreasSteno/status/1818564028370760011
Reviewing the charts from our introduction on Gold, we recall that Gold has diverged from 10-year US Treasury real rates after more than a decade and a half together. Long term, this divergence should lead to more US dollar weakness, unless something (like US Energy) helps the Dollar find support.
For the moment the move up in Gold prices occurs simultaneously with a move of physical metal from London to Shanghai.
With ETFs having a lower amount of gold under management:
Source: https://x.com/TaviCosta/status/1812919944184799590
And not unsurprisingly the amount of Gold on warrant in China has increased dramatically:
Turning back to the US Energy market, our Nat gas production price is still much lower than the rest of the world in terms of Oil:
Source: https://fred.stlouisfed.org/series/DCOILWTICO
Source: https://fred.stlouisfed.org/series/DCOILBRENTEU
Which may help with US strength over the longer term.
Federal Reserve Watch:
And finally, turning to the Fed….
We see that the 2-year rate is still asking the Fed, "When are you going to start cutting rates?"
Source: https://x.com/PikerCapital/status/1817982780384723423
And the answer seems like it will be soon, as 2-year rates trend down, and the prospect of a Recession seems closer at hand than in previous months.
Conclusion:
It appears that the proximate risk of a Recession has increased with the potential for yield curve to un-invert.
I've been anticipating a recession for 2025, but the potential for a sharp downturn seems to be mounting and could happen sooner rather than later.
I’ve been worried about Inflation coming in the last months of the Summer, but now I think that the Recession’s timing could potentially occur simultaneously or in close proximity to those Inflationary pressures.
Probably Inflation still comes first. But the drama of the yield curve is happening quicker than expected.
The Fed seems to be tracking all of this, and although the Fed left rates flat at the end of July, it seems poised to bring rates down - or at least talk markets into believing that rate cuts are a real potential - if the market starts to drop quickly.
The volatility of a potential market drawdown is really the key here.
We've previously focused our writing on what we consider the Fed's most important, though hidden, mandate: US Treasury market stability.
The Commercial Real Estate and Regional Bank situation stays on our radar as the primary reason for Treasury market dislocation, but second on the list would be a sharp drop in US equity markets. Either of these could cause the Fed to stabilize the market, including a more aggressive footing on rate cuts.
By contrast, a slow drawdown in equities probably doesn’t trigger the Fed to adjust rates.
If possible I think the Fed will try to keep rates steady unless something in the market "breaks", and I expect the Fed to attempt to use rhetoric to influence markets rather than actual rate changes.
Until next month.
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