The recession vs. inflation battle is increasingly shifting towards the former as reflected in the recent paring back in US Federal Reserve tightening expectations and growing market pricing of rate cuts beginning as soon as early next year.  The weakness in the US July Services purchasing managers index (PMI) added more weight to this argument.  This week's second quarter US Gross Domestic Product (GDP) data is likely to confirm two quarters of negative growth, which should mean technical recession though in the case of the US, recession is defined by the US National Bureau of Economic Research (NBER) as "a significant decline in economic activity that is spread across the economy and lasts more than a few months".  Either way, the US economy is on a softer path. This week is a big one for events and data.  The Fed is widely expected to cut US policy rates by 75 basis points tomorrow.  Expectations of a bigger 100bps move have been pared back.  If the Fed does hike by 75bp it will likely result in interest rates reaching a neutral rate (the theoretical federal funds rate at which the stance of Federal Reserve monetary policy is neither accommodative nor restrictive).  At this meeting there will be a lot of focus on the Fed's forward guidance but in reality the magnitude of hikes at the next FOMC meeting in September will be contingent on key inflation releases and other data, with two inflation reports (10 August and 13 September) to be published ahead of the next Fed meeting. In Europe there was yet more disappointing economic news this week, with the German July IFO business sentiment survey falling sharply. The data gave a similar message to last week's weak PMIs, provides yet more evidence that the German economy is falling into recession.   News that Russia has cut gas deliveries to Europe through Nord Stream 1 will only add to such concerns.  After surprising with a 50bp rate hike last week, the ECB arguably faces a bigger problem than the Fed.  At least in the US, the consumer is still quite resilient, with demand holding up well, while in contrast, demand is weak in Europe and the economy is sliding into recession at a time when inflation is around four times higher than target.  Emerging markets have found some respite from the pull back in the US dollar over recent days, but it is questionable how far the dollar will sustain any pull back.  Increased worries about the US economy and a paring back of Fed tightening expectations could damage the dollar further, but let's not forget that the Fed is still tightening more rapidly than many other major central banks, which ought to limit any US dollar weakness.  Even so, even if it’s a short-term phenomenon, emerging market currencies and bonds will find some relief from a softer dollar tone for now.  That said, many frontier economies such as in North Africa and South Asia are likely to struggle from higher food and energy prices for some months to come. If the dollar does resume its ascent it will only add to their pain. 

The Fed will hike another three-quarter point on Wednesday, at least. But looking ahead, what then? Target Rate Probabilities for Wednesday July 27 FOMC Meeting The above chart is courtesy of CME Fedwatch.  Looking Ahead Looking Ahead to December Target Rate Probabilities for Wednesday December 14 FOMC Meeting Key Points  The single most likely outcome (39.4 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.25-3.50 percent.  There is a 17.4 percent chance of 3.00-3.25 percent.  There is a significant (43.2 percent) chance of something higher than 3.25-3.50 percent.  The second most likely outcome (31.5 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.50-3.75 percent.    The current rate is 1.50-1.75 percent. There are meetings on July 27, September 21, November 2, and December 14. A 75 basis point hike in July is a given. That would takes us to 2.25-2.50 percent. To get to 3.25-3.50 percent in December would take two more 50 basis point hikes in September and December.  I am very skeptical the Fed will follow through all the way to the implied December targets.  But if inflation is still rampant (I doubt that), and the credit markets behave (doubly doubtful), the Fed will do what the odds suggest. Powell: "We understand better how little we understand about inflation” Let's review Powell's comments at the June 29 ECB economic forum: Powell: "We understand better how little we understand about inflation” Powell: “There’s a clock running here. The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.” Powell: "The process is highly likely to involve some pain, but the worse pain would be in failing to address this high inflation and allowing it to become persistent." Powell: "Households are in very strong financial shape. They still have a lot of excess savings from forced savings and also fiscal transfers. The same is true of businesses. The labor market is tremendously strong. Overall the US economy is well positioned to stand tighter monetary policy." Powell: “Is there a risk we would go too far? Certainly there’s a risk. The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.”   I strongly disagree with point three except for the labor market. The other points could not possibly be more clear, even if I do not necessary agree. Inflation Expectations Point #1 above is related to the idea that inflation expectations might get out of hand. The concept is ridiculous as discussed on June 25 in The Asininity of Inflation Expectations, Once Again By Powell and the Fed. However, Powell's position is clear: "Our job is literally to prevent that from happening, and we will prevent that from happening.” "The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.” Expect an Overshoot Based on Powell's comments. I expect the Fed to overshoot. Then, unless the jobs picture or credit markets go haywire, Powell will be very reluctant to step on the gas out of fear of creating another inflation cycle. Expect a Long But Shallow Recession With Minimal Job Losses I expect a Expect a Long But Shallow Recession With Minimal Job Losses But if correct, that's the good news.  The bad news is Artificial Wealth vs GDP: Why Earnings and the Stock Market Will Get Crushed

The Fed will hike another three-quarter point on Wednesday, at least. But looking ahead, what then? Target Rate Probabilities for Wednesday July 27 FOMC Meeting The above chart is courtesy of CME Fedwatch.  Looking Ahead Looking Ahead to December Target Rate Probabilities for Wednesday December 14 FOMC Meeting Key Points  The single most likely outcome (39.4 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.25-3.50 percent.  There is a 17.4 percent chance of 3.00-3.25 percent.  There is a significant (43.2 percent) chance of something higher than 3.25-3.50 percent.  The second most likely outcome (31.5 percent) for the FOMC meeting on Wednesday December 14 is for the Fed to target its base rate in the range 3.50-3.75 percent.    The current rate is 1.50-1.75 percent. There are meetings on July 27, September 21, November 2, and December 14. A 75 basis point hike in July is a given. That would takes us to 2.25-2.50 percent. To get to 3.25-3.50 percent in December would take two more 50 basis point hikes in September and December.  I am very skeptical the Fed will follow through all the way to the implied December targets.  But if inflation is still rampant (I doubt that), and the credit markets behave (doubly doubtful), the Fed will do what the odds suggest. Powell: "We understand better how little we understand about inflation” Let's review Powell's comments at the June 29 ECB economic forum: Powell: "We understand better how little we understand about inflation” Powell: “There’s a clock running here. The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.” Powell: "The process is highly likely to involve some pain, but the worse pain would be in failing to address this high inflation and allowing it to become persistent." Powell: "Households are in very strong financial shape. They still have a lot of excess savings from forced savings and also fiscal transfers. The same is true of businesses. The labor market is tremendously strong. Overall the US economy is well positioned to stand tighter monetary policy." Powell: “Is there a risk we would go too far? Certainly there’s a risk. The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.”   I strongly disagree with point three except for the labor market. The other points could not possibly be more clear, even if I do not necessary agree. Inflation Expectations Point #1 above is related to the idea that inflation expectations might get out of hand. The concept is ridiculous as discussed on June 25 in The Asininity of Inflation Expectations, Once Again By Powell and the Fed. However, Powell's position is clear: "Our job is literally to prevent that from happening, and we will prevent that from happening.” "The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.” Expect an Overshoot Based on Powell's comments. I expect the Fed to overshoot. Then, unless the jobs picture or credit markets go haywire, Powell will be very reluctant to step on the gas out of fear of creating another inflation cycle. Expect a Long But Shallow Recession With Minimal Job Losses I expect a Expect a Long But Shallow Recession With Minimal Job Losses But if correct, that's the good news.  The bad news is Artificial Wealth vs GDP: Why Earnings and the Stock Market Will Get Crushed

A quiet start to what will otherwise be a lively week in financial markets with particular focus on the US as the Fed meets Wednesday and big tech report earnings. Stock markets are modestly in the green, with a fair amount of straw clutching at play once more. Earnings not being as bad as feared, the Fed only hiking by 75 basis points and China putting together a plan in the hope of averting the next wave of the property crisis is among the reasons being given for stock markets rising. It all seems a bit desperate. Don't get me wrong, we need to take the small wins but none of the above scream recovery to me. Stock markets can't fall forever but the latest bear-market rally seems to be being driven by as much finger crossing as the previous ones. I think there may be a few more nasty surprises that will test the foundations of the latest market bottom. Those foundations could be rocked over the next few days if things don't go to plan. I expect the Fed will not hit the panic button yet and hike by 75 basis points again which still represents a very aggressive tightening path this year. But they may signal that another is possible in September, with markets currently having that as a coin toss. Whether that will be enough to send equity markets into another spiral I'm not sure. It could certainly dampen sentiment, to what extent may depend on what Microsoft, Alphabet and Meta have to say, among others. I'm not sure sentiment can take the combination of disappointing earnings and a more aggressive Fed. So we should all enjoy what is shaping up to be a relatively calm start to the week. The next few days are going to be full on and by the end of the week, we could have a better idea of whether the US is heading for recession, as appears to be the case here in Europe. Oil holds below $100 ahead of the Fed I'm sure oil traders have their sights set on many of the same events this week, as they try to better grasp the economic threat facing the US and other countries around the world. A recession is the primary downside risk for crude prices and it's all that's keeping them below $100 in the short term. A faster path of Fed tightening and disappointing earnings reports from the US this week could trigger further weakness in the oil market although I am sceptical about the scale of the downside risk. The tightness of the oil market cannot be ignored even as recession odds rise. A sustainable break below $90 still looks like a big ask and if it does materialise, it will be a bit of a double-edged sword. Gold recovering but faces big test Gold is continuing to enjoy a recovery and is set for the third day of gains as yields remain well off their highs. The US 10-year is not far from three-month lows, with 2.75% looking a potentially important level as this is where it has repeatedly rebounded higher from in that time. That will be interesting to gold traders as it could suggest the recovery is already on borrowed time or is about to take off. We may have to wait for the Fed on Wednesday to see which of the two it's going to be with the recessionary implications of its actions key to the outcome. Make or break moment? I can understand why some may be getting excited by the price action we're seeing in bitcoin over the last couple of weeks. It's come from trading below $20,000 to hit a six-week high and now the pullback of recent days has been very mild. That in the short term is arguably a bullish signal but it's still too early to say whether it will have legs. And as is the case with other assets, the Fed could make or break the recovery.

Key highlights EUR/USD is facing a major hurdle near 1.0225. A key bearish trend line is forming with resistance near 1.0230 on the 4-hours chart. EUR/USD technical analysis Looking at the 4-hours chart, the pair was able to recover losses and climbed above the 1.0100 and 1.0150 resistance levels. The bulls pushed the pair above the 38.2% Fib retracement level of the downward move from the 1.0614 swing high to 0.9951 low. However, the pair is now facing hurdles near 1.0225 and the 100 simple moving average (red, 4-hours). There is also a key bearish trend line forming with resistance near 1.0230 on the same chart. The next major resistance is near the 1.0280 level. It is near the 50% Fib retracement level of the downward move from the 1.0614 swing high to 0.9951 low. A close above the 1.0280 level could open the doors for a steady increase. The next major resistance could be near the 1.0360 level, above which the pair could rise to 1.0420. If there is no upside break, the pair could correct lower and dip below 1.0180. The next major support is 1.0150, below which the pair could resume its decline. In the stated case, the pair might decline towards the 1.0110 level.

Key highlights EUR/USD is facing a major hurdle near 1.0225. A key bearish trend line is forming with resistance near 1.0230 on the 4-hours chart. EUR/USD technical analysis Looking at the 4-hours chart, the pair was able to recover losses and climbed above the 1.0100 and 1.0150 resistance levels. The bulls pushed the pair above the 38.2% Fib retracement level of the downward move from the 1.0614 swing high to 0.9951 low. However, the pair is now facing hurdles near 1.0225 and the 100 simple moving average (red, 4-hours). There is also a key bearish trend line forming with resistance near 1.0230 on the same chart. The next major resistance is near the 1.0280 level. It is near the 50% Fib retracement level of the downward move from the 1.0614 swing high to 0.9951 low. A close above the 1.0280 level could open the doors for a steady increase. The next major resistance could be near the 1.0360 level, above which the pair could rise to 1.0420. If there is no upside break, the pair could correct lower and dip below 1.0180. The next major support is 1.0150, below which the pair could resume its decline. In the stated case, the pair might decline towards the 1.0110 level.