Markets Pricing-In Certain Recession; Is There Any Hope?

Tuesday, June 14, 2022

Pre-market futures are in the green this morning — yes, we’re seeing some weeds emerge from the cracks in the craters left from yesterday’s trading and that of the past three sessions. Everything is down, nothing is spared; even Financials, which should be looking stronger with raising interest rates on the near-term horizon, were down -3% yesterday. I suppose the specter of a full-blown recession isn’t much of a prospect for anyone.

Producer Price Index (PPI) numbers for May are out, in-line on the month-over-month headline to +0.8%, +0.5% on core (stripping out food and energy costs), which is 10 basis points lower than predicted. This is good news, albeit to a minute extent. PPI determines the costs of goods to producers of other goods.

Year over year numbers are getting much of the emphasis — both on the PPI and CPI (Consumer Price Index) side — for one very good reason: they demonstrate to what extent inflation has entered the economy from the same time a year ago. Headline year over year PPI came in at +10.8% — continuing the string of 10%+ prints going back six months to December of last year.

So a +10.8% year over year PPI read means inflation is stubborn — duh! — but at least we’re off the +11.5% in March, but that was an all-time high mark going back to the beginning of the PPI survey in 2010. It’s possible we’re seeing where the top of this curve is overall, but so far there’s no evidence prices are falling fast.

What we all need to do, in lieu of hand-wringing and worrying about our investments in the near-term, is wait for the Fed to make its move Wednesday (its monetary policy meeting begins today) and await the impact of the rate hike, whether it’s 50 basis points or 75. Keep in mind a 75 basis-point hike doubles the current Fed funds rate; for all the negative talk and Fed-shaming we’ve endured of late (much of it for good reasons), the ball is definitely rolling.

Need more proof? Look no further than the Housing market: since the start of the year, the 30-year fixed mortgage rate has doubled from 3% to 6% — its highest level since the end of 2008. Even though common wisdom is there is no direct correlation between Fed funds rates and 30-year mortgages, the data tells a different story: homebuying exploded in 2021 and stayed hot through most of Q1, and at least a portion of this could reasonably considered due to prospective buyers understanding rates were going to raise once the Fed started hiking.

Now we’re expecting inventories +15% for 2022, where four weeks ago only +0.3% was anticipated. This is significant. Even though this year is still expected to be the second-hottest since the Great Recession in the late Oughts (behind 2021), activity is quickly slowing way down. Considering that housing is usually the most expensive thing a consumer buys — and considering how many subsequent goods and services industries are affected by housing activity — we may be seeing a leading indicator out of the current “certain recession” narrative.

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