Recognition Day

Due to travel and a family commitment, HAI will offer just prices and a few very brief thoughts this week. For full coverage of the high impact events of this past week, HAI refers the reader to Doug Nolands Credit Bubble Bulletin.

This was an important week in markets, to be sure. The peak inflation narrative was dealt a hefty blow with Fridays Consumer Price Index (CPI) inflation report. It came in hotter than expected on both the headline and core reading.Expectations were for an 8.2% Y/Y headline reading, but insteadactual headline CPI was a stunning new 40-year high print of 8.6%.

Also on Friday, the latest University of Michigan Surveys of Consumers confirmed another substantial decline in what werealready alarming recessionary low-levels of consumer sentiment.

University of Michigan sentiment collapsed in preliminary June data, crashing from 58.4 to 50.2. The results were dramatically worse than the 58.1 expectations. In addition, the current conditions gauge sank to a record-low 55.4 from 63.3, while a measure of expectations decreased to 46.8 from 55.2.

In the words of Surveys of Consumers Director Joanne Hsu:

Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession. All components of the sentiment index fell this month, with the steepest decline in the year-ahead outlook in business conditions down 24% from May. Consumers assessments of their personal financial situation worsened about 20%.

In a statement, Hsu added that, Throughout the survey, consumers signaled strong concerns that inflation will continue to erode their incomes, and the factors they cited are unlikely to abate soon.

She concluded that, While consumer spending has remained robust so far, the broad deterioration of sentiment may lead them to cut back on spending and thereby slow down economic growth.

All told, the events of the week were extremely significant.Friday in particular seemed to represent a recognition day on the part of markets that multiple significant issues are coming to a head, and hopes of a soft featherbed landing are not realistic. In response, stocks sold off aggressively, bonds tanked as yields spiked, and the dollar was bid up. Commodities were mixed with strength seen in energy and the gold market as well.

The Fed is up against it here like never before. Separate data out this week confirmed that consumers are already blowing out credit card debt to keep up with expenses. The University of Michigan data amounts to a collective scream from a gravely suffering consumer thats taken about as many inflation hits as can be tolerated. The CPI report, along with energy prices that continue to melt up, announced that the inflation dragon raining fire on the consumer is by no means finished. As a result, to maintain any shred of credibility, the Fedmore now than evermust be seen as aggressively attacking inflation.

On the other hand, a hawkish Fed policy follow-through at this point will almost certainly accelerate a slowdown and potentially trigger a very nasty recession. So, the lose-lose optionality weve talked about for many months has arrived at a policy path decision point. The ball is now in Powells and the FOMCs court. Next weeks Fed meeting should offer some important indications of just how the Fed plans to negotiate between a rock and a hard place.

Weekly performance: The S&P 500 dropped 5.05%. Gold was up 1.37%; silver was nearly flat, up 0.09% on the week;platinum took a hit, down 4.47%; and palladium lost 3.97%. The HUI gold miners index shed 0.20%. The IFRA I Shares US Infrastructure ETF was lower by 4.37%. Energy commodities were higher. WTI crude oil was up another 1.51%, while natural gas was up 3.84%. The CRB Commodity Index was higher by 1.96%, while copper lost 4.03%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 5.24% on the week, while the Vanguard Utilities ETF (VPU) was down3.83%. The dollar was higher by 1.89% to close the week at 104.15. The yield on the 10-yr Treasury surged by 19 bps to end the week at 3.15%

Have a wonderful weekend!

Best Regards,

Morgan Lewis
Equity Analyst & Investment Strategist
MWM LLC