A new variant of the Coronavirus is making the holiday season gloomy, as restaurants are closing and large-scale events are being canceled, causing Americans to postpone travel plans.
According to the latest commodity price index, if this is an accurate forecast of the future, the US economy may be headed for a recession soon. This means that, In November, the US index of consumer prices showed that prices grew by 22.8% year-over-year, its highest reading since November 1974, when it jumped by 23.4%.
There have only been three occasions since 1960 when the index went above 15%, 1973-74, 1980-82, and 2007-08. During each of those periods, there was a US recession and massive stock market declines. During January 1973, the S&P 500 spiked, but didn’t bottom until October 1974, when it had fallen by nearly 48%.
The PPI peaked at 16% in February 1980 as inflation once again wreaked havoc on the economy. After peaking in November, stocks fell nearly 25% by August 1982. Two recessions occurred during that period, one in 1980 and one from 1981 to 1982.
The rate of inflation spiraled out of control in 2007 and peaked at 17.4% in July 2008. S&P 500 stock prices peaked in October 2007 and bottomed out in March 2009, falling by approximately 56% in response to this spike in inflation.
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As impossible as it may seem to imagine, a recession may be on the horizon according to the PPI, and the bond market may also hint at it. In order to understand how the bond’s yield curve changed over the past few months, it is necessary to consider its slope, which has been flattening recently, with the short end of the curve rising and the long end falling.
Over the past month, the spread between the 10-year and the 2-year has reduced by roughly 50 basis points to 80 basis points. As a result of the rising 2-year yield and falling 10-year yield, the yield curve has flattened. Traders are pricing in rate hikes by the Fed at the front of the curve, while they are pricing in slower long-term growth at the back of the curve.
Also, breakeven inflation expectations have declined recently. By the end of December, the price level was 2.65%, down from about 3.25 % a month earlier. Inflation expectations have declined sharply, which suggests high prices may slow US economic growth enough to prevent inflation.
The bond market does not seem to be optimistic about the future of the US economy in either case. It will be interesting to see how things turn out, but there may be hope.
November has seen sharp falls in many commodities prices and December may begin to reflect negative readings.
Since the peak of mid-November, oil has fallen nearly 15%. Despite falling inflation rates, it may already be too late, considering the damage already done and the high price levels now in place. Hopefully, history won’t repeat itself and the PPI index will prove to be inaccurate this time around. Hopefully.
