Inflation

[over9k]

Remember all those posts I made about rates remaining high for longer, basically just hitting a plateau rather than up and then back down in quick succession? And how the yield curve is probably going to deinvert as a result of long duration soaring rather than short duration dropping back down?

The fact that treasury is now selling long duration bonds rather than short duration is very, very telling.

Normally they'd still sell shorter duration in anticipation of the yield curve going back to normal, but the very fact that they're not doing this and are instead selling long duration tells us what they think is going to happen to both rates and the yield curve as a whole.

Normally long duration rates are higher than shorter and so selling long duration is the height of stupidity... Unless the yield curve is inverted (so long duration is actually the cheapest way they can borrow) and they don't think long duration is going to stay where it is much longer

 

[over9k]

And wouldn't you know it, all the growth plays (SOXL, FNGU, TQQQ) are pummeled the hardest on the day.

Not a coincidence.

 

[over9k]

 

[waterbottle]

View attachment 160460

Remember all those posts I made about rates remaining high for longer, basically just hitting a plateau rather than up and then back down in quick succession? And how the yield curve is probably going to deinvert as a result of long duration soaring rather than short duration dropping back down?

The fact that treasury is now selling long duration bonds rather than short duration is very, very telling.

Normally they'd still sell shorter duration in anticipation of the yield curve going back to normal, but the very fact that they're not doing this and are instead selling long duration tells us what they think is going to happen to both rates and the yield curve as a whole.

Normally long duration rates are higher than shorter and so selling long duration is the height of stupidity... Unless the yield curve is inverted (so long duration is actually the cheapest way they can borrow) and they don't think long duration is going to stay where it is much longer

If this is truly the new normal, i.e. higher rates for longer, then the market has certainly NOT priced that in given long term yields are still where they are.

The US economy is essentially a group of tech companies focussed on producing AI (who's actually buying this?) with a sprinkle of rocket producers for the Ruso-Ukraine war, held up by newly employed waiters and bell boys (200k out of 324k new jobs in July were in leisure & hospitality!) who are about to be saddled with student debt repayments and tighter credit conditions come September/October 2023.

How is the US not going to go into recession??

The whole narrative of re-shoring manufacturing is BS. That would have to be years away. The US manufacturing PMI has been contractionary for the past 9 months!

 

[Knobby22]

If this is truly the new normal, i.e. higher rates for longer, then the market has certainly NOT priced that in given long term yields are still where they are.

The US economy is essentially a group of tech companies focussed on producing AI (who's actually buying this?) with a sprinkle of rocket producers for the Ruso-Ukraine war, held up by newly employed waiters and bell boys (200k out of 324k new jobs in July were in leisure & hospitality!) who are about to be saddled with student debt repayments and tighter credit conditions come September/October 2023.

How is the US not going to go into recession??

The whole narrative of re-shoring manufacturing is BS. That would have to be years away. The US manufacturing PMI has been contractionary for the past 9 months!

Yes, they have overcooked the rate rises. Too many hikes. they will have to reduce rates over time.

Due to the ability to borrow with very long fixed loans and the slow reaction to higher rates there is a big lag between actions and effect. They will go into recession.
Europe, Canada, NZ are also going to go into recession.

The breakout of inflation was mainly caused by supply problems and excess money. Those issues are essentially history.

The only country with a chance to achieve a soft landing is Australia.

 

[waterbottle]

Yes, they have overcooked the rate rises. Too many hikes. they will have to reduce rates over time.

Due to the ability to borrow with very long fixed loans and the slow reaction to higher rates there is a big lag between actions and effect. They will go into recession.
Europe, Canada, NZ are also going to go into recession.

The breakout of inflation was mainly caused by supply problems and excess money. Those issues are essentially history.

The only country with a chance to achieve a soft landing is Australia.

Inflation nowcasting by the Cleveland Fed has put MoM inflation for July at 0.34 and August at 0.6. Likely due to crude. The Fed has the narrative for more hikes...

Also not sure why Australia would escape recession. China's economy is fooked because of weak global demand, same as Germany. Not sure who we're going to be selling our dirt to. Hopefully China will put together a nice bailout package.

 

[divs4ever]

Yes, they have overcooked the rate rises. Too many hikes. they will have to reduce rates over time.

Due to the ability to borrow with very long fixed loans and the slow reaction to higher rates there is a big lag between actions and effect. They will go into recession.
Europe, Canada, NZ are also going to go into recession.

The breakout of inflation was mainly caused by supply problems and excess money. Those issues are essentially history.

The only country with a chance to achieve a soft landing is Australia.

with Albo ( a graduate in economics ) in charge ... good luck with that

 

[divs4ever]

Inflation nowcasting by the Cleveland Fed has put MoM inflation for July at 0.34 and August at 0.6. Likely due to crude. The Fed has the narrative for more hikes...

Also not sure why Australia would escape recession. China's economy is fooked because of weak global demand, same as Germany. Not sure who we're going to be selling our dirt to. Hopefully China will put together a nice bailout package.

i expect China to copy the US and pick winners ( bail out selected friends , probably African based investments )

i would love to be wrong but unless India makes a bold move , i see lots of dark clouds

 

[Knobby22]

i expect China to copy the US and pick winners ( bail out selected friends , probably African based investments )

i would love to be wrong but unless India makes a bold move , i see lots of dark clouds

China already tries to not trade with us.

 

[divs4ever]

China already tries to not trade with us.

but Australia hasn't been clever enough to develop major new markets ( with the exception of Ms. Rinehart ) so we could have some options

 

[Knobby22]

with Albo ( a graduate in economics ) in charge ... good luck with that

Inflation nowcasting by the Cleveland Fed has put MoM inflation for July at 0.34 and August at 0.6. Likely due to crude. The Fed has the narrative for more hikes...

Also not sure why Australia would escape recession. China's economy is fooked because of weak global demand, same as Germany. Not sure who we're going to be selling our dirt to. Hopefully China will put together a nice bailout package.

The government has been doing a lot of fiscal restraint, not renewing the temporary tax cuts provided by Morrison to lower paid workers and cancelling a lot of Morrison policies to supply money to various causes, and generally being fiscally restrained allowing interest rates to remain lower than comparable economies. this has helped to not cause large increases in unemployment. Australia is on track for a soft landing.

And a side effect of the fiscal restraint is a surplus. I think they are doing OK.

https://www.news.com.au/finance/economy/australian-economy/labor-to-slash-21bn-of-government-spending-after-audit-of-departments/news-story/fe4781c1c81ec2e88342eda89466929c

 

[Knobby22]

but Australia hasn't been clever enough to develop major new markets ( with the exception of Ms. Rinehart ) so we could have some options

We are trading again with China on many things that we weren't recently due to diplomacy.

 

[wayneL]

How can negative real rates be overcooked? They are basically only bleu at this level. The problem is that they were too low for too long.

 

[over9k]

How can negative real rates be overcooked? They are basically only bleu at this level. The problem is that they were too low for too long.

Overcooked in what way? In reference to what?

 

[waterbottle]

Overcooked in what way? In reference to what?

I believe it's in reference to the commonly held opinion that RBA rates are sufficiently restrictive and hikes are no longer necessary, despite the differential between US/ECB/NZ rates.

 

[wayneL]

Overcooked in what way? In reference to what?

Ref Knobby's comment above about rates being overcooked

 

[over9k]

If this is truly the new normal, i.e. higher rates for longer, then the market has certainly NOT priced that in given long term yields are still where they are.

This is exactly what I've been saying for ages - that this isn't being priced in when it should be, but the key point in my last few posts is that it's starting to.

Check this out:



See how everything below 5 year has remained basically the same vs a month ago (and the entire curve is up on 6 months ago) but all the long duration stuff has moved up?

The US economy is essentially a group of tech companies focussed on producing AI (who's actually buying this?) with a sprinkle of rocket producers for the Ruso-Ukraine war, held up by newly employed waiters and bell boys (200k out of 324k new jobs in July were in leisure & hospitality!) who are about to be saddled with student debt repayments and tighter credit conditions come September/October 2023.

No way. The U.S economy is the most secure and most diversified in the world. The U.S is self-reliant for almost everything except microchips and even that had that huge reshoring package a few months back and tens of billions is now being spent by samsung, tsmc et al on manufacturing plants in the united states.

How is the US not going to go into recession??

The whole narrative of re-shoring manufacturing is BS. That would have to be years away. The US manufacturing PMI has been contractionary for the past 9 months!

Post-covid. Kind of like how travel, leisure etc services have seen a massive bump (hence your previous comments about leisure/hospitality).

You don't build a factory, chip manufacturing plant etc etc in five minutes. It takes years.

Also not sure why Australia would escape recession.

With you on this. Immigration is basically the only reason I can think of.

We are trading again with China on many things that we weren't recently due to diplomacy.

China's done for.

 

[over9k]

Meanwhile, here's what's being priced in in the u.k:

 

[over9k]

The current narrative basically everywhere is "inflation is coming down so we can probably hold rates where they are for now" just for everyone's info.

Things are heading in the right direction but whether they will continue to do so is a different question entirely.

 

[waterbottle]

I'm still not sold on the US being recession-proof. Just because their economy is diversified doesn't mean they're not susceptible to recession. And the manufacturing that you mentioned isn't coming online until years down the track, so it's redundant when considering what's happening in the near term.

RE: rates, not sure where exactly CBers are going to go from here.
I take your point about the long end of the curve now playing catch up with the short end, but my gut still tells me that something will eventually break and force CBers to cut. That's based on a historical record that demonstrates rapid hikes are followed by a pause and eventually rapid cuts.
Besides, it's the only explanation IMO for why CBers are "pausing to determine the effects of hikes" - why pause if you don't think you're harming the economy? I thought the inflation dragon had to be slayed for economic and political purposes?
I suspect that CBers are privy to other data/discussions that the public aren't, hence the general anxiety with, and rhetoric for, further hikes (except for BoE and RBNZ) despite "sticky inflation".

A world with 5.x% interest rate after a decade of ZIRP is going to be a huge shock to growth for the world, particularly ex-US, as most companies with huge amounts of cash on hand to fund operations are American based. Why can't we go back to ZIRP?