Inflation Sinks In – by Justin Vaughn

(Justin Vaughn, Editor, Options Trading Report)

The Sleeping Bear Has Awakened…and Monday christened the slide.. The steep downturn Monday, after five days of sliding, the indices set new lows. The Dow Jones Industrial Average led the way falling 329 points on Monday to close at 29260, and into Bear Territory. The index has fallen over significantly to give credence to entering ‘Bear Territory.’ The S&P 500 rested at a ‘new’ bottom at 3655. The Technology laden Nasdaq Composite followed suit settling at 10802. As the week continued, conditions worsened. Early on, the stream of negative news affected traders and investors. Scattered announcements from the UK government indicated severe tax cutting measures were coming forth as well as deep concerns of inflation by the Bank of England, and anticipation of drastic tightening. The bold response by the bank sent the message that long overdue correction was coming forth. “My worry is there is a sense that the Fed is going to raise rates until it breaks the economy, or something breaks,” said Paul Donovan, chief economist at UBS Global Wealth Management. As of Tuesday, government bonds showed strength, the 10-year Treasury stood at 4.235%, up from 3.813% on Friday (9-23). Tuesday’s market was a bit tighter, with investors and traders scooping up ‘bargains’ and saving profits. Some of the Nasdaq tech picked up, however softened by the day’s end. As the day finished many equities began to show weaknesses, as the next two days will illustrate. Amid all the chaos in the markets a flicker of optimism show its head giving investors a rare shade of positivemess. Thursday traders began to take on a more serious tone as the Fed’s actions are seemingly ‘sinking in,’ with the realization that drastic measures are coming to combat inflation. There is a strong underlying feeling that the aggressiveness of the Fed and the amazing strength of the U.S. dollar is creating a roiling of the world economies. Commodities are deeply affected by the strong dollar, as the currency is used in nearly all trades, pushing other currencies to the background, and ultimately worth less-against the dollar.

Current data is showing a unique resilience of the labor market, as all information indicates positive trending, with consistent adding of jobs, bucking the Fed’s tightening policies. “Government news is bad news in that today’s job number again reiterates that the Fed has a long way to go,” said Phil Blancato head of Ladenburg Thalmann Asset Management in N.Y. “The fear in the marketplace is that the Fed is going to push us into a very deep recession, which will cause an earnings recession, which is why the market is selling off,” he said.

The two year carousel has seen lumber prices rise and fall as futures closed Tuesday atr $429.30 per thousand board feet down nearly 70% since the Federal Reserve started tightened. As home mortgage interest rates have crossed 7% since the Fed started its interest raises, home building and remodeling has slowed significantly, as new housing permits have also decreased-and are still heading downward. Recent data shows home building is down 13% from levels in April, a time when building was at its peak. Paul Jannke of Forest Economic Advisors said, “his firm forecasts that lumber consumption will decline by as much as 2.5% this year and up to 4.5% in 2023 as home construction stalls and remodeling demand reverts to normal following the pandemic renovation boom.”


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Joshua D. H. Sager, Vice President, Loan Officer at Old National Bank, Ann Arbor, “Residential Mortgage rates continue to fluctuate with some lenders jumping to 7.125% over the past week. When considering the 30-year fixed rate was at a historic low in 2021 of v2.65%, many new borrowers are facing a stark reality of a mortgage payment that has increased significantly year over year for a home with the same value. How significant? A mortgage of $400,000 at 2.65% over 30 years would result in a monthly payment of $1,600 versus a payment of $2,700 at 7.125%, significant indeed.”

Antoine Bouvet, a senior rates strategist at ING, WSJ “All central banks are singing from the same hymn sheet: They’re trying to get on top of inflation no matter what,” he said. “The Fed set the tone very clearly….They will continue regardless of rhe economic pain inflicted on the economy.”

Mike Smith, a portfolio manager at Allspring Global Investments, WSJ “I would just lean the other way and say maybe, just maybe, we’re seeing the peak of negatively”, Mr. Smith said, pointing to depressed levels of consumer and investor sentiment. “It’s been a very difficult week, everybody’s feeling pain,” he added.

Jerome Haegeli, group chief economist at reinsurer Swiss Re, and a former official at Switzerland’s central bank, “The global economy is in the emergency room. Anything like a soft landing is wishful thinking.”