Dollar raging, China easing, and Fed pausing
Mega chart pack and global macro update. China back in focus. US economy struggling. Lots of charts.
Today’s global macro update and chart pack is crammed with crucial updates. China’s current round of currency devaluation is calling our attention, and developments in the thickening 2022 plot of Fed policy error and negative real GDP must be conveyed to you in a timely manner. That means now.
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The US economy is likely heading for a third consecutive quarter of negative real GDP growth. We still believe the Fed will hike rates by 50 basis points in September and now firmly believe hiking will end there. Charts: 2s, 10s.
The dollar is raging. It is a symptom of Fed hikes. Charts: DXY.
China is a mess right now and in full easing mode. This is a disinflationary impulse to the US economy. Charts: USDCNY.
Charts: bitcoin, both long-term and shorter-term looks.
The recession persists
You know that “technical” recession we’re in? It looks like it might extend into the third quarter. The rest of the year is starting to come into focus for us, but before we peer through our scope, we must look back on the last two quarters of negative GDP.
The US economy, on a nominal basis, grew almost 8% in Q2 (!!). But with the inflation adjustment, real GDP came out slightly negative. Currently, the inflation hurdle is so high, it makes positive Q3 real GDP a monumental task once again. So is the US economy up for it? No, it doesn’t look like it.
While inflation is showing signs of topping, the inflation adjustment to Q3 GDP will remain substantial. That means nominal growth must be robust enough to push real growth positive. Underlying economic activity, instead, is starting to show a severe slowdown occurred during the months of July and August.
Yesterday, a PMI release showed a drastic contraction in US economic activity. The decline in services (to a dismal reading of 44, down from 49) made us fall out of our chair this morning.
Coupled with contractionary housing data and monthly inflation forecasted at flat or declining in September, we see yesterday’s PMI as the flashing red signal that the US is indeed in a real, and we mean both inflation-adjusted and flesh-and-bones, recession. The Federal Reserve Bank of Atlanta’s GDPNow forecast for Q3 is currently for 1.6% growth and scheduled to update this morning (likely lower). We do not envision it to remain materially above zero for long. The implications of a third consecutive quarter of negative real GDP are enormous on monetary policy.
Here are the key dates as we head into the holidays. We’ll explain, via the calendar, why we believe the Fed is heading to a 3% policy rate, followed by a pause: