The 2-month yield and the Effective Fed Funds rates are from yesterday. The 20-year yield is my estimate. My starting point is yesterday’s number and I assume a similar reaction as the 30-year long bond.
Today’s Bond Market Change
- 2-Year: -0.11
- 3-Year: -0.13
- 5-Year: -0.13
- 7-year: -0.12
- 10-year: -0.10
- 30-year: -0.13
The last time I wrote about the yield curve was on June 12 in Yield Curve Inversions Return, Signaling Another Recession Warning.
Here are the yields from June 14, when the 10-year yield peaked.
Yields on June 14
- 1-Year: 3.15
- 2-Year: 3.45
- 3-Year: 3.60
- 5-Year: 3.61
- 7-year: 3.60
- 10-year: 3.49
- 30-year: 3.45
Yields on July 1
- 1-Year: 2.70
- 2-Year: 2.81
- 3-Year: 2.86
- 5-Year: 2.89
- 7-year: 2.93
- 10-year: 2.89
- 30-year: 3.10
Change Since June 14
- 1-Year: -0.45
- 2-Year: -0.64
- 3-Year: -0.74
- 5-Year: -0.72
- 7-year: -0.67
- 10-year: -0.60
- 30-year: -0.35
Multiple times in and out of inversions followed by a sudden sustained decline in yields is a strong signal that recession has started.
ISM
.@MarketWatch on @ISM #Manufacturing PMI®: “(Factories) are still operating at high capacity, but business is not growing as rapidly as it was last year. … (New orders slowed) because of high prices, long lead times and excess inventory.” https://t.co/Gfn641Gomo #economy #ISMPMI
— Institute for Supply Management (@ism) July 1, 2022
What triggered today’s reaction was a poor ISM report in which new orders plunged 5.9 points from 55.1 to 49.2 to contraction.
Holy Grail of Stock Jocks Shocks
HOLY GRAIL OF STOCK JOCKS SHOCKS
ISM NEW ORDERS CONTRACTS FOR FIRST TIME POST STIMMIES FROM 55.1 TO 49.2, LOWEST SINCE MAY 2020
— Danielle DiMartino Booth (@DiMartinoBooth) July 1, 2022
Employment as Well
ISM manufacturing index amplifies concerns about the US economic outlook–not only due to the larger-than-expected fall in the composite to its lowest level in 2 years but also because of the slippage into contractionary territory for both the employment and new orders components
— Mohamed A. El-Erian (@elerianm) July 1, 2022
Aluminum
After 7 straight months of being listed in short supply, Aluminum is no longer being reported to be in shortage in the ISM manufacturing report.
— Skanda Amarnath (@IrvingSwisher) July 1, 2022
Fed Will Sacrifice the Economy
ISM New orders are contracting. The Fed has no choice but to continue to sacrifice the economy in the name of inflation. Quite the trap they put themselves in last year because they “misunderstood” inflation. pic.twitter.com/0yqX5E405p
— Michael Lebowitz, CFA (@michaellebowitz) July 1, 2022
The Fed Misunderstood Inflation
“ISM New orders are contracting. The Fed has no choice but to continue to sacrifice the economy in the name of inflation. Quite the trap they put themselves in last year because they ‘misunderstood’ inflation.”
Musical Tribute
Powell: “We understand better how little we understand about inflation”
In reference to misunderstanding inflation, please see Powell: “We understand better how little we understand about inflation”
The above link offers many quotes from the Fed, ECB, and Bank of England that show central banks are clueless.
On June 22, I commented I’ve Seen Enough, the US is in Recession Now, Q&A on Why
Forget about a soft landing. Recession has already started. The questions are how deep and how long?
I will address those questions in another post.
This post originated at MishTalk.Com.
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Mish
Near term, I expect the Fed to soon face pressure to back off of tightening that’s barely even begun. If they yield, we get prolonged stagflation at best. If they don’t buckle, we could see a crash that’ll rattle everyone’s teeth, both in the markets and the real economy. Having shot their wad with QE from 2008-2022, their flexibility is quite limited. Keep in mind that, any blah blah to the contrary, the Fed’s tools are blunt. They almost always overshoot in one direction or the other.
Now step back and look at history. In 1893, there was a Panic that rattled everyone in this country at the time. In the 1894 off-year election, more congresscritters were dis-elected than in any other congressional elections in American history. People quite literally danced in the streets. One third of Congress turned over, almost entirely from D to R after a histiory of no particular dominance by either side. In 1896, the robber barons’ handpicked candidate, William McKinley, crushed William Jennings Bryan, ushering in nearly 40 years of Republican dominance broken only by Woodrow Wilson, 1912-1918.
Congressional districts are much less competitive now than they were then, so we’re almost certainly not going to see one-third of Congress get tossed out this year. But the shift is on, and it could be a lot bigger than expected. Abortion? Bah, it doesn’t matter. Guns? Nope. To quote James Carville: “It’s the economy, stupid.”
I’ve said several times that I think the Fed is in a tight spot. The first QE was necessary, but they never sterilized it before launching the second and much larger round. That, plus the stimulus checks here, launched inflation. If they tighten as fast as they theoretically should, they could kill finance and the real economy. If they don’t tighten fast enough or far enough, inflation will by itself deeply damage the economy.
When the Fed adds reserves through the NY open market desk, it creates money for banks to lend. That’s where it ends. The Fed cannot create the ability to service the debts. That happens through the real economy, critically aided by economic growth and finance’s role in efficient capital allocation, among other things. Similary, the Fed cannot create or destroy demand, at least not directly. Its actions have a major impact on demand by the impact that monetary policy has on the real economy, but it’s the economy and its players who create demand.
I think it’s critical to understand these fundamentals. The Fed is a critical player, but the Fed is not the instigator of 5-year economic plans, and thank God for that.
I keep repeating some version of this here. People need to understand that price increases are the result of inflation of the money supply beyond economic growth. Inflation itself is 100% monetary. Thus, if someone snapped his fingers and oil supply rose and I could buy diesel for $1.97 rather than $6.70, inflation would be unaffected unless the money supply was reduced. This seems counterintuitive or overly scholastic, but neither is true. People equate inflation with price increases because it’s a measurement shorthand. Inflation necessarily precedes a rise in the general price level.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -2.1 percent on July 1, down from -1.0 percent on June 30. After this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7 percent and -13.2 percent, respectively, to 0.8 percent and -15.2 percent, respectively.
Remember, these are the same people who, within the past week, have clung bitterly to their guns (QT, fed funds hike) and religion (faith in a soft-landing fantasy.) One day they shout the the Fed’s not doing enough. Now they’re starting to suggest, and soon will be shouting, that the Fed has done too much. America has seen them before; their grandparents whistled past the graveyard from 1929 to 1932. The day’s coming when the soothsayers will be mocked from sea to shining sea.