Getting Closer to a Recession

After a failed attempt to break above its 100-day moving average, the stock market is taking losses in early morning trading. This is helping support mortgage bond pricing, which typically moves in opposition of the stock market. This is somewhat surprising considering this morning’s Producer Price Index (PPI) report showed that inflation on the producer side was much higher than the market anticipated. Although Producer inflation doesn’t necessarily trickle down to the consumer level, it is certainly a strong forward indicator of higher consumer inflation. We will find out Wednesday when the Consumer Price Index (CPI) report is released.

Yesterday’s Federal Reserve announcement was just as planned, with the Fed opting not to hike rates at this time. However, as we feared, the short announcement made by the Fed following the release confirmed the path of continued, gradual rate hikes and sets the stage for one final hike in 2018 when the Fed meets next in December. The scary thing about this next hike is that it could be the one that inverts the yield curve. History shows that once a yield curve is inverted, a recession is imminent to follow within a year or two. Although I don’t agree with the Fed’s decision to continue hiking, there certainly is enough inflation concern to justify the move. I feel that a recession is already imminent, and further rate hikes will expedite the process and cause it to be a harder recession when it does hit. We are not in the uncomfortable space where the general population hasn’t accepted the reality of a pending slow-down, so it continues to pressure the economy into irrational levels. That will soon change.

Although bonds are performing well this morning, there is little hope of prices making significant gains today. We will maintain a locking bias.