Rising jobless claims, softer home sales, and a buildup in gasoline inventory all show the Fed front-loading rate hikes are causing demand destruction. Though it may take a couple of quarters for core CPI items, like rents, to decline, chances of a lower terminal rate are rising. As UMich and NY Fed inflation expectations have pulled back and 5y5y breaks are stable, the Fed should next week continue to hike 75bp and reiterate its data-dependent mode, and odds are increasing for a softer Fed rate hike profile. The massive rally in US Treasuries happened at the same time as the ECB meeting on Thursday, with yields moving down almost 20bp. However, the trigger is not so much by ECB, and it's more to do with the Philadelphia Fed Business Outlook. The number was feeble at almost 10-year lows before the pandemic. The reading on initial jobless claims was also a concern as investors have seen three weeks of back-to-back increases. The final nail will be the US PMI on Friday. If US PMI goes under 50, it will make a strong case for recession fears ahead of the Fed meeting next week. While structural headwinds are gusty for the yen, setting a fundamental background for the currency to stay weak. Yet a recessionary environment is a cyclical blessing – lower global growth and US rates consistently prove that the JPY is among the cleanest and easiest hedges to ride out the gloom of recessionary doom. And despite Kuroda's dovish rhetoric, Japanese consumers don't want a weak Yen.

Rising jobless claims, softer home sales, and a buildup in gasoline inventory all show the Fed front-loading rate hikes are causing demand destruction. Though it may take a couple of quarters for core CPI items, like rents, to decline, chances of a lower terminal rate are rising. As UMich and NY Fed inflation expectations have pulled back and 5y5y breaks are stable, the Fed should next week continue to hike 75bp and reiterate its data-dependent mode, and odds are increasing for a softer Fed rate hike profile. The massive rally in US Treasuries happened at the same time as the ECB meeting on Thursday, with yields moving down almost 20bp. However, the trigger is not so much by ECB, and it's more to do with the Philadelphia Fed Business Outlook. The number was feeble at almost 10-year lows before the pandemic. The reading on initial jobless claims was also a concern as investors have seen three weeks of back-to-back increases. The final nail will be the US PMI on Friday. If US PMI goes under 50, it will make a strong case for recession fears ahead of the Fed meeting next week. While structural headwinds are gusty for the yen, setting a fundamental background for the currency to stay weak. Yet a recessionary environment is a cyclical blessing – lower global growth and US rates consistently prove that the JPY is among the cleanest and easiest hedges to ride out the gloom of recessionary doom. And despite Kuroda's dovish rhetoric, Japanese consumers don't want a weak Yen.

This rally may well be on borrowed time despite its decent run over the past five days, thanks to next week’s earnings barrage and an impending Fed decision. Equities mixed but clock up good performance for the week “Investors will be pleased to see that the rally in stocks remains intact, having lasted longer than some of the other rebounds we have seen so far this year. But they will be wary of pushing their luck too hard into next week, given the avalanche of earnings heading their way, plus a Fed decision and the first reading on US second quarter GDP that might easily provide fresh recession worries.” Can earnings season keep up the good news? “It hasn’t been a bad start to the latest reporting season, but next week is absolutely chock-full of updates, although Amazon, Apple and others are bound to top the billing. Stocks have gone from pricing in full-blown doom to being much more optimistic, but sentiment remains fragile at best, and it wouldn’t take much to spark yet another leg down that rapidly unwinds the gains seen so far in July.”

This rally may well be on borrowed time despite its decent run over the past five days, thanks to next week’s earnings barrage and an impending Fed decision. Equities mixed but clock up good performance for the week “Investors will be pleased to see that the rally in stocks remains intact, having lasted longer than some of the other rebounds we have seen so far this year. But they will be wary of pushing their luck too hard into next week, given the avalanche of earnings heading their way, plus a Fed decision and the first reading on US second quarter GDP that might easily provide fresh recession worries.” Can earnings season keep up the good news? “It hasn’t been a bad start to the latest reporting season, but next week is absolutely chock-full of updates, although Amazon, Apple and others are bound to top the billing. Stocks have gone from pricing in full-blown doom to being much more optimistic, but sentiment remains fragile at best, and it wouldn’t take much to spark yet another leg down that rapidly unwinds the gains seen so far in July.”

Federal Reserve rate meeting – 27/07 – its certain that the Federal Reserve will be hiking rates again this week by another 75bps, with the only question being what comes in September, and whether we see 50bps or another 75bps. The most recent US inflation numbers jumped again in June to 9.1% on the CPI measure, although core prices did slip back. This jump once again highlights how far behind the curve the US central bank is, however, we are now starting to see signs that the US economy is starting to slow sharply in certain areas. For now, we can expect to see the Fed lean into the narrative that they need to get inflation under control even if it pushes headline unemployment quite a bit higher. Nonetheless, there does appear to be a concern that the Fed doesn’t want to overdo it even if the unexpectedly sharp increase in headline CPI did raise concerns that the FOMC might move by 100bps this week. An aggressive 100bps is by no means off the table, but it became less probable after two of the most hawkish Fed members, Christopher Waller, and St. Louis Fed President James Bullard pushed back on that, saying that 75bps remained their favoured option, prompting a modest pullback in the US dollar which briefly hit a 20 year earlier this month. Another factor weighing on the US dollar was a weaker than expected University of Michigan 5-year inflation expectations survey, which fell to a one year low of 2.8%, suggesting that we might be close to a near term peak for inflation, while a sharp drop in services PMI this week could prompt some concerns about an economic softening.   US Q2 GDP – 28/07 – is the US already in a technical recession? This week we’ll find out with the first iteration of Q2 GDP. In Q1 the US economy contracted by -1.6%, largely down to a big fall in net trade which contributed to a -3.2% drag, while inventories saw a -0.8% decline, on the back of supply chain disruption, as well as purchases being brought forward into Q4 which resulted in a big inventory built-up into Q1. This isn’t likely to be repeated in Q2 and as such we should see a recovery, however that doesn’t mean we can expect to see a strong rebound. With the labour market still looking resilient and consumer spending holding up reasonably well despite the cost-of-living pressures, expectations are for a GDP growth of 0.5%, driven primarily by personal consumption and some inventory bounce back. US Core PCE Deflator (Jun) - 29/07 – while headline CPI and PPI for June both saw unexpected rises in the headline numbers, it was notable that on the core number, both fell back. That’s been the overall trend for core prices since February and March, however the rise in food and energy prices is starting to create ripple out effects that could call a halt to the recent declines from the current peaks we saw in March. Core PCE deflator, peaked at 5.3% in February, and has declined every month since then, coming in at 4.7% in May. What will the June numbers tell us? Are we nearing a peak, and even if we are does the Fed even look at its preferred measure of inflation targeting? For the moment it doesn’t appear that the Fed is that interested, instead focussing on headline CPI to shape policy decisions.      EU Flash CPI (Jul) – 29/07 - having seen the ECB raise rates for the first time since 2011 last week, it’s unlikely that this will have a marked effect on how quickly inflationary pressures have been rising across the region. With inflation as high as 20% in some parts of the euro area, whether the headline rate is at -0.5% or -0.25% is neither here nor there. Having seen June CPI confirmed at 8.6%, only last week, the persistently high readings we’ve been seeing in respect of PPI, which is at over 30% in several parts of the EU, means we probably haven’t seen the peak yet. As such we could well see headline inflation rise closer to 9% in this week’s flash CPI for July.   easyJet Q3 – 26/07 – this year was supposed to be the year that airlines were supposed to break free from the problems of covid, as the loosening of travel restrictions and increase in flying hours prompted a return to normal service. As far as the share price is concerned it’s been anything but, with rising costs and significant travel disruption hindering the path to recovery, and the shares sliding to 10-year lows earlier this month. In the airline’s H1 numbers, group headline costs rose by 117% to just over £2bn, while revenues...

Recession calls are getting louder. If history is any guide, the bust is coming. Good news for gold! An economic hurricane is coming. Brace yourselves! This is at least what Jamie Dimon suggested last month. To be precise, he said: “Right now, it's kind of sunny. Things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road, coming our way. We just don’t know if it's a minor one or Superstorm Sandy.” When JP Morgan Chase’s CEO is painting such a gloomy picture, you know that something serious is going to happen! Indeed, both on Wall Street and Main Street, calls for a recession are becoming more common and louder. According to Markit, credit default swaps have nearly doubled so far in 2022, surpassing the pre-pandemic levels. The higher their prices, the greater the chance of default in the eyes of investors. The high yield bond market is also showing that worries about the state of the economy are rising. As the chart below shows, the spread between so-called junk bonds and Treasuries surged from about 300 to more than 500 basis points in 2022. It means that the risk premium – a premium that investors require to hold risky bonds – has risen considerably this year, to the heights of the coronavirus crisis. The implication is clear: market sentiment is deteriorating and confidence in the economy’s strength is declining. The widening credit spreads are usually a good harbinger for the gold price. Not only investors have become more worried recently. As the chart below shows, US consumer sentiment as measured by the University of Michigan dived below 60, to a level not seen since the Great Recession and, earlier, the recession of 1980. Are these concerns justified? I’m afraid so! The Atlanta Federal Reserve’s GDPNow tracker is now pointing to an annualized real GDP growth of just 0% for the second quarter. Atlanta, we have a problem! To understand what is happening right now, it would be useful to recall the Austrian business cycle theory. According to the Austrian school of economics, there is a phase of boom triggered by the increase in the money supply in the form of credit expansion and the policy of low interest rates that stimulate borrowing and investment, and then the inevitable bust. The bust is imminent as a credit-based boom results in aan imbalance between saving and investment and widespread malinvestments. So, when the credit expansion is slowing down and interest rates are rising, it turns out that many investment projects were not justified by the fundamentals and could be started only because of artificially lowered interest rates and excessive lending. When the bubble bursts, a recession unfolds. Now, let’s apply this theory to the present situation. In a response to the coronavirus pandemic, governments all over the world panicked and introduced costly lockdowns. To compensate for the losses, the Fed slashed the federal funds rate to almost zero and boosted the monetary base by 40% in just two months. But what distinguished this episode from the previous monetary injections is that the Fed introduced many liquidity programs for Main Street. As a consequence, in the two years after the outbreak of the pandemic, the broad money supply M2 rose by more than 40%, while bank credit increased by about 20% (see the chart below). As the bulk of this newly created money went to entrepreneurs, they started new investments. However, because input supply had not increased, producer prices soared (as shown in the chart below, producer prices have risen 40% since the pandemic), forcing entrepreneurs to borrow money in the market, driving up bond yields and causing a yield curve inversion. At some point, when interest rates increase too much, entrepreneurs will have to abandon or seriously restructure their projects, triggering a full-scale recession. We are already witnessing some tech companies firing workers in an attempt to reduce costs. What does it all mean for the gold market? Well, the bust is coming, or, actually – as Kristoffer Hansen points out – the crisis is already upon us. This might be surprising as, typically, business cycles are much longer, but the 2020 monetary impulse was an unusually large but one-time event. This is good news for the yellow metal, which shines during financial crises. Indeed, in the recessionary year of 2008, gold gained 4%, although it initially lost due to fire-sales, and it rallied even more impressively in 2009 and subsequent years. So far, I would say that we are still in 2007, when the stock market has already entered the territory but the real economy hasn’t fallen into recession yet. However, this is likely to change in the upcoming months. If history is any guide, gold will ultimately come out stronger...