The most critical chart of the moment: 10 year US Treasury Bond yields
The market is absorbing the “higher for longer” narrative pushing up longer-term yields.
Recent comments by Jay Powell, Jamie Dimon, Neel Kashkari and others have strengthened the probability (reality?) that the widely-anticipated 2024 decline in rates won’t become reality. It doesn’t look like Santa is coming to town after all.
This impacts a wide variety of assets, explaining why stocks are down about 7% from their recent high.
Making matters worse, there’s increasing chatter that short-term rates might need to increase further to combat inflation. With WTI touching $93/bbl the risk of resurging inflation is real.
The energy market is experiencing significant near-term supply-demand imbalances, and this will likely put a floor under oil prices. OPEC is forecasting a 3.3 million barrel shortfall by the end of this year.
Everything everywhere is connected to oil. Food, transportation, production, plastics…you name it. So while energy is specifically represented in headline inflation, the impact of higher energy prices will eventually feed into core inflation.
Of course, if the markets squeeze too hard eventually something breaks. This is what happened in the summer of 2008 (when WTI hit $140/bbl and inflation was spiking) leading up to the financial crisis. Paradoxically, the risk of higher sticky inflation is what ultimately could push the economy into a disinflationary spiral. The consumer is already on weak footing and is vulnerable to further price shocks.
Moreover, today we get the added pressure of QT, which nobody seems to talk about.
Just how strong is the economy?
The economy is strong but it’s not.
The following chart is worth 1,000 words. It illustrates the incomplete nature of many economic statistics. Sure, there may be tons of job posting but the following chart shows how many of those postings actually result in hires. That number has taken a significant dive over the past 12 months.
Posting a job to test the waters costs nothing. Hiring requires an actual commitment of money.
Not only is the jobs market deteriorating, the cost of living is rising. Consumers are getting hit on both the revenue (incomes) and expenses (cost of living) side of their income statements putting a squeeze on cashflows. Moreover, the wealth effect from improved personal net equity positions (assets less liabilities) is gone.
While the GDP data has held up relatively well, I suspect beneath the surface you’ll see a significant divergence in consumer financial health, owing to a big gap in financial means.