The US economy is entering treacherous waters. United Wholesale Mortgage’s bold 0% Down Purchase Program might seem like a beacon of hope for homebuyers, but the broader economic picture is far more ominous. The long and variable lags of monetary policy are finally taking their toll, offsetting the fleeting benefits of government deficit spending. The Citi Surprise Index, a bellwether of economic expectations, is plummeting, signaling that the US economy is faltering against elevated expectations.
The Fed is caught in a vice. Inflation, confirmed by a supercore CPI running at 4.9% year-over-year and an anticipated core PCE of 0.3% month-over-month, remains stubbornly high. This leaves the Fed with no room to maneuver, unable to lower rates to support growth without fanning the flames of inflation. The economy is stalling, but the Fed is handcuffed, creating a perilous gap where growth is slowing, and monetary support is absent.
This economic air pocket poses severe risks. The reduction in interest expense “stimmys” to households and corporations will hit spending, further dragging down economic activity. Treasury bond sales continue unabated, with no new economic pump in sight. The approaching QRA in July looms large, and the 5-week options expiry cycle will dilute hedging flows, increasing the probability of market turbulence.
Hawkish Fed commentary, rising oil prices post the Xi/Putin meeting, and the upcoming BRICS central bankers meeting in Moscow could set the stage for a volatile trading environment between May and June. The Fed meeting coincides with CPI release on the 12th, and a significant tax payment liquidity drain on June 17th could add to the financial fireworks.
Stocks are at their highs, and volatility is at its lows, a deceptive calm before the storm. As an investor, I remain steadfastly short on small caps, convinced that hedging is prudent. The US economy is teetering on the edge, and the time for complacency is over. We are entering a window of weakness where the risk of a macroeconomic shakeup is high. Buckle up; the ride is about to get bumpy.
Source:
Trigger Warning: Chart of the Day: Citi Surprise Index vs SFR9
My hypothesis is that the US economy has begun to slow due to the long and variable lags of monetary policy finally starting to offset the positive benefits that have come from higher government deficits putting… pic.twitter.com/KP9FXPKLqH
— Craig Shapiro (@ces921) May 16, 2024