The Chillingly Realistic Path To Rate Cuts This Year


Consumer confidence has plummeted already. With gasoline and food prices weighing on far more than American sentiment, it’s no wonder much of the public may have come around to the idea of recession. Politicians and economists are another matter. Nothing in life—let alone the economy—is inevitable, but the entire global system may have passed that point of no return some time ago before anyone (outside of markets) had realized it.

“And I heard a voice in the midst of the four living creatures saying, “A quart of wheat for a denarius, and three quarts of barley for a denarius; and do not harm the oil and the wine.” Rev. 6:6

Treasury yields and eurodollar curves have been forecasting contraction not inflation for well over a year already. Starting out as small relative probabilities, as longer-term yields buckled and the eurodollar curve distorted, this was just the markets’ way of signaling a higher degree of confidence in this pessimism.

It all broke wide open, so to speak, once already shameful gasoline prices took a step too far around the beginning of March. In all likelihood, that was the point of no return.

Since then, these same markets after having moved on from “if” to “when” are now thinking especially hard about “how bad.” And this is where recent data fits in.

Unfortunately, various major and minor economic statistics around the world have rather unsurprisingly confirmed these market suspicions. First, a slowdown rather than acceleration in the middle of last year when the public’s attention was exclusively fixed on what “everyone” said was big inflation.

That slowing was a warning it had only ever been “inflation” (supply shock, not excess money) which meant it all came with an expiration date (yes, transitory). This unappreciated 2021 downturn was picked up in all the data, too, including U.S. (and overseas) real GDP.

Then, like curves, GDP changed for the worse during 2022’s first quarter. In America, the Bureau of Economic Accounts (BEA) said output adjusted for prices (real) fell rather alarmingly in those three months. The final revisions to Q1 were released just now and were even weaker than previously thought (below).

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