A Recession Two Years Out?

With the negative sentiment, the bond market has driven mortgage interest rates near multi-year high levels in recent days. However, bond prices are stable this morning, fueled by a surprisingly low Producer Price Index (PPI) report. Although this report measure inflation on a wholesale level and not on a retail level, the market seems to be appreciating the first drop in PPI that we have seen in a year and a half. Tomorrow we will receive the Consumer Price Index (CPI) report. Since CPI measures inflation on the retail level, it is far more significant to the bond market. The market is still anticipating consumer inflation to fall from an annualized rate of 2.9% down to 2.8%. Although not a significant drop, it will be nice to see the pace of consumer inflation slowing. That will be good news for the bond market, which hates inflation.

Ray Dalit, a highly respected billionaire hedge fund manager, said that the US economy is likely two years from experiencing a downturn. He feels that this will primarily be a currency crisis as compared to the last recession which was a debt crisis. In a currency crisis, the value of the dollar would weaken, essentially increasing the costs of goods and services. Further, importing products from abroad would cost more, adding to the supply challenge. This would improve the value of commodities, which would drive gas prices higher. Overall, not a good environment for the citizens of the US to deal with.

With bond prices weak, we will maintain our locking bias.