This month’s CPI reading of 9.1% marked a 40-year high, despite the Fed’s efforts to tame inflation. GDP numbers for Q2 were published and the US economy shrank for a second consecutive quarter.
GDP US Chained 2012 Dollars QoQ SAAR (GDP CQOQ Index) 12-months
Despite the general rule to identify a recession, the fall of GDP in two successive quarters, the National Bureau of Economic Research has yet to formally make an announcement. The contraction of GDP in the second quarter leads to the near certainty that we are in a recession.
This week, Fed Chair Jerome Powell announced another 0.75% rate hike, the fourth so far this year. Powell reaffirmed his commitment to curbing inflation yet acknowledged the Fed only controls short-term interest rates. The second piece of the puzzle relates to long-term rates which are influenced by short-term interest rates and are set by the market. The main goal of the Fed is to reach a point where higher borrowing costs (higher rates) reduces production and inflation in a way that does not force employers to lay off employees. However, the working class is getting crushed already with real incomes not keeping pace with inflation. In addition, many tech companies are struggling this year and have already started to lay off employees.
The 10-yr interest rate decline since mid-June has had a significant impact on longer dated treasuries. The 30-year mortgage rate has dropped from 5.81% on June 23rd to 5.30% on Friday, July 29th. The lower longer-term rate along with the rally in stocks could complicate the Fed’s mission to tame inflation as demand may remain strong. Powell reassured the markets that more hikes are likely in the future as the Fed is focused on reducing inflation despite possibly causing a recession.
Agricultural crop prices broadly rallied this week posting the biggest gain since early March. Dry weather in the US and Europe are causing concern among investors that production will be impacted in the future.
Bloomberg Agriculture Spot Index (BCOMAGSP Index) 6-months
The Bloomberg Agriculture Spot index includes commodities like corn, soybeans, cotton and wheat.
Soybeans (S) 6-months Daily
