In the last week, as odds have climbed of a 75-basis-point interest rate increase from the Federal Reserve at its September 22 meeting, the U.S. dollar has reversed its slide during the last two weeks of July.
Stands to reason. Higher U.S. interest rates make dollar-denominated assets, such as Treasuries, more attractive. More dollar buying, stronger dollar.
The yield on the 10-year Treasury has dropped a whopping 36 basis points in the last month to just 2.65%.
That’s either a strong vote that the economy is about to move into a deeper recession or that the Federal Reserve won’t raise interest rates by as much as had been anticipated earlier in the year. Or maybe a vote for both. But that drop in yield (with a rise in Treasury prices) has certainly added a bit of fuel to the current Bear Market rally. And if you’re trying to figure out how long that rally might last, I suggest you add the direction of Treasury yields to your list of indicators to watch.
In light of the attacks, the question is whether there actually was a real deal with Russia to reopen Ukraine’s Black Sea ports to grain exports at all. I’d expect to see Friday’s drop in commodities reverse on Monday. Reuters reports: Russian missiles hit the southern port of Odesa, the Ukrainian military said, threatening a landmark deal signed just the day before to unblock grain exports from Black Sea ports and ease global food shortages caused by the war. From the Guardian: Barely 12 hours after Moscow signed a deal with Ukraine to allow monitored grain exports from Ukraine’s southern ports, Russia targeted the country’s main port of Odesa – through which grain shipments would take place – with cruise missile strikes. The attack raised new doubts about the viability of the deal, which was intended to release about 20 million tonnes of grain to ward off famine in parts of the developing world.”
The dollar is likely to get another boost from the Bank of Japan and the European Central Bank this week. On Thursday, the European Central Bank is likely to report its first interest-rate increase in more than a decade. But the increase is likely to be just 25 basis points. That will be a stark reminder of how far behind the Federal Reserve, which raised interest rates 75 basis points in June and is expected to increase rates by another 75 basis points at its July 27 meeting. On Thursday the Bank of Japan is expected to keep its benchmark interest rates at its current low, low, low level.
Gold fell below $1800 an ounce this week to close at $1742 per ounce for August delivery on the Comex in New York. And frankly, I don’t see gold turning around until 1) we get a signal from the Federal Reserve that the biggest interest rate increases are behind us, or 2) we get a big, bigger, biggest fear-inducing event that sends everybody scurrying to their hedges. Until then, I think a stronger dollar will continue to pressure gold (and silver) lower.
Friday’s stock market action is a very timely reminder that the economy–and trends in it–isn’t the stock market. On Friday we got news that moved up the schedule for a recession. The Atlanta Federal Reserve’s GDPNow tracker indicates a very strong chance that the economy will show negative GDP growth for the second quarter–a drop of a 2.1% annual rate–when the initial estimate of GDP is published on July 28. Combined with the 1.6% rate of contraction for GDP in the first quarter that would be enough to push the economy into a recession. (The standard definition of a recession is two consecutive quarters of negative GDP growth.) But on Friday, stocks, by and large, went up.
At its March 16 meeting the Federal Reserve’s Dot Plot showed Fed officials forecasting that the Fed’s short-term interest rate, now set at 0.75% to 1.00%, would end 2022 at 1.9%. Things have changed since then with the Federal Reserve due to meet on Wednesday, June 15. There’s currently a fairly large divergence on interest rate expectations for the end of 2022.The June meeting and the new Federal Reserve Dot Plot showing the consensus forecast by Fed officials will go a long way to narrowing that divergence. But I don’t expect all disagreement to vanish from the markets on Wednesday. And I do expect that resolving this disagreement will present a bumpy road to the financial markets.
If you’re wondering how to decide if Friday’s BIG BOUNCE was based on some fundamental positive change in the economy or was a result of every human and computer trader deciding all at once that stocks were undervalued, take a look at this group of the day’s winners.
For a day, Friday, May 6, at least the pattern of divergence between consumer staples stocks and consumer discretionary stocks that has ruled much of 2022 reasserted itself. Now the question is How long will the pattern hold?
There were very few places to hide in this week’s stock market decline. A number of the old reliable places to hide aren’t providing much protection in the current stock market drop. But I did see two splashes of green today among the sea of red.
Anybody looking to reduce their energy reliance on Russia is looking for LNG (liquified natural gas) right now. As tight as supplies are, however, and Europe is essentially only able to increase its supply by poaching natural gas headed for Asian markets, the supply of new facilities to liquify natural gas and load it onto tankers for for delivery to European terminals looks even tighter.
Here is what I expect: A strong spring and summer rally–powered by FOMO and by gains in Post-Pandemic economic recovery stocks. But that rally will be subject to big plunges because so many investors are poised to sprint for an exit. And all of this, later in 2022 will be followed by an actual Recession market. My worry is that the FOMO rally will make it harder for investors to make the moves they need t make now to prepare for that Recession market. The time to prepare is now nd not when everybody has bid up the price of Recession market favorites. Tricky, no?
