It is widely believed the Fed is near the end of its tightening campaign, a campaign that has sent rates logarithmically higher from 0.00% in March 2022 to 5.25% today. The debate is now emerging as to how long rates will remain at current levels and the odds as to whether inflation will decline to the 2.0% speed limit.
Inflation is expected to reaccelerate for the remaining of 2023 because of “technical factors.” These factors include a different reference or base year for the calculation. However, most will assume or conclude inflation is accelerating for a more practical reason…rising energy prices that will impact almost all segments of the economy including food and services.
This begets a more diffuse area of concern. Has the bureaucracy altered the benchmarks to such a degree that integrity of the data is now questioned?
Today the methods and location of production and the basic economic premise have radically changed. Guideposts are nonexistent as an economy has never transitioned from QE to QT. Mistakes will be made as no one has ever encountered today’s environment. Asking rhetorically is this a possible reason as to why the actual outcome of policy is radically different than the forecasted one?
And then there is method or place of production. Reliability has replaced price as the only determinate of a purchasing decision as trade has been weaponized. Last week government statistics indicated that imports from China have “plunged” by 25% during the first six months of 2023.
A strong argument can be made this is a major reason as to why the Chinese economy is sputtering as their economy is export denominated, defined as the strength of or legislative policies of its trading partners will have an outsized impact on its production.
Today the global economies are on the opposite side of the bookends. Falling interest rates have been replaced by rising ones. Price has been replaced by reliability. These systemic changes are occurring in an environment where most are already questioning the veracity of government statistics, statistics that have been altered via bureaucratic fiat.
The uncertainty in the markets is great, all amplified by lofty valuations and extensive ownership of a handful of companies.
Commenting on yesterday’s activity, both ends of the Treasury market were volatile as retail sales exceeded expectations. Both long dated and short dated sold off significantly only to recover most of the declines perhaps under a possible flight to quality. As noted, Chinese growth has “sputtered” causing a potential real estate crisis and Russia unexpectedly boosted interest rates to defend the Ruble.
Equites ended about 1.2% lower for a myriad of reasons including the a fore mentioned geopolitical issues, to a warning from rating agency Fitch that it may downgrade the money center banks., to the emerging acknowledgment that rates said may be around current levels for a greater period than expected.
What will happen today?
Last night the foreign markets were down. London was down 0.42%, Paris down 0.01% and Frankfurt up 0.10%. China was down 0.82%, Japan down 1.46% and Hang Seng down 1.36%.
Futures are little changed ahead of the release of the Minutes from the recent Fed meeting. The 10-year is up 3/32 to yield 4.19%.
