Recently, I showed you how we are starting to see stress in the European financial system.
Now, I’ll take you further down the rabbit hole to discuss the Fed’s potential risk of overshooting.
To illustrate: Have you ever seen someone fishtail on a wet road?
If you do it right, you just steer into the turn until you get grip back on your tires and regain control of your car.
But if you panic, odds are you’ll swing your steering wheel too hard and overcorrect…
Throwing your car into a ditch.
The Fed is running the risk of doing the same thing… but with the entire economy.
Wednesday, they stated they’re expecting a 50-75 basis point hike in July.
That’s not shocking, and the Fed Fund Futures market priced it in already.
The issue I see is the follow-up comments — that they may need to be “even more restrictive” and that they see the risk of “entrenched inflation.”
The same knuckleheads that told us inflation was transitory last year are now digging in their heels and expecting a push to 3.25% by the end of the year.
That pushes mortgages above 7% and corporate financing much higher than folks are used to.
But here’s the thing:
The 75 bps hike may have already kicked inflation in the teeth.
Have you seen commodity prices recently?
Here’s wheat:
Wheat Chart
And corn:
Corn Chart
And heating oil:
Oil Chart
We’ve already seen hard corrections off the recent highs.
Of course, a “reverse crash” in the dollar is helping this trend:
Dollar Chart
And the Euro is at risk of hitting parity for the first time since 2000:
Euro Chart
Are you starting to connect the dots here?
I’ve been calling out inflation since Fall 2021, so I’m not digging my heels in on being wrong…
I’m considering flipping my position.
So here’s the thesis I’ll be working through over whenever we talk about global macro:
The Federal Reserve will hike rates too far, too fast, which will break inflation in the US…
At the expense of creating a deflationary cascade in Europe and China.
If deflation hits too hard, it’ll cause a contagion back in the US, and the Fed will be too slow to react…
Which is where things can start to get weird again.
I don’t want to scare the pants off you. This is not a high-odds bet, and it may be months away before we see the wheels fall off.
Everything could get fixed, and maybe we hit all-time highs in a year or two.
But with the way prices are moving, you must pay attention to this as we head into the Fall.
And to prepare for if things get weird, I suggest you get your hands on my Market Roadmap.
Why?
Because it points out the market’s favorite prices — and it’s one of my favorite trading tools.
