Between a rock and a hard place
Abraham George Market Musings
Atlanta Fed president Raphael Bostic
We are coming to the end of a strong earnings season and it has been really good. We also have hot inflation data that could turn out to be more disturbing and ugly. But there’s something else happening that does not fit the equation.
The Atlanta Fed is known for tracking the GDP estimates much ahead of many others who do the same. In August, their estimates suggested a rise of 6% but since then it has been in steady decline. The latest estimates suggests only a meager rise of 0.2%. So what happened?
There has been a sharp decline in consumer spending relative to the first two quarters of 2021. There was also evidence from the Michigan consumer sentiment survey from August. It had plunged to 10 year lows. The explanation given by the economists who did that survey was that consumers are postponing their purchases, for fear of falling future living standards.
Did the ‘postponement of purchases’ created this major slide in economic activity, in an economy that was consistent with a growth of 6% in the first two quarters of this year?
While I have always pointed out the possible risks that we faced with a complacent Fed and an economy running hot on inflation, what I could not understand was the behavior of the 10 year rates. Though yields picked up sharply in the last few weeks, it was never out of the ordinary. However, maybe on the back of the consumer survey, the 10 year yield broke down yesterday to trade as low as 1.52% . That’s an 11 basis point decline for one day which is big.
This created knock on effects in key commodities which has been a proxy for growth and inflation to be knocked down. We will have the Q3 GDP data released this morning and by the looks of what is happening in the markets it could come negative.
What happens next? The Fed is caught between a rock and a hard place. The Fed has already signaled that they will be starting to take its foot off the stimulus engine next week.
Will the discussions turn to, ‘are we facing a potential recession?’. If that happens, will we be facing stagflation (a word we have never used in our writings so far - inflation without growth)? These are million dollar questions we all need to ponder while President Biden will have to muster all that he can to push through one of the biggest, boldest and controversial fiscal spending plan in the history of United States.
So, there we go. Thanks for reading Breezy Briefings. If you enjoyed this, I'd really appreciate if you could take a second and tell a friend. Honestly. It makes such a big difference.
Forward this email. Recommend the newsletter. Share on Twitter, WhatsApp, Telegram, LinkedIn, Slack, wherever!
Official Telegram Channel: https://t.me/BreezyBriefings
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.