Hey There Income Hunter,

After last week’s close completed the best month for stocks since November 2020, the Fed sent Neel Kashkari to speak on Sunday’s Face the Nation to slow the rally down. 

The funny thing is, Kashkari is probably the most dovish member of the Fed, but he went on the show saying the central bank is “committed to bringing inflation down and we are going to do what we need to do.”

Now, Kashkari is not a voting member this year but he went on about how “inflation continues to surprise the Fed to the upside, and so far the labor market is very, very strong”.

So, it was more of the same old Fed looking at old data to deploy a solution for the future.

One step forward and three steps back. 

The market shrugged it off to start the week as more bad news on the economy was good news for an eventual Fed pivot. 

Today, I’ll share more forward-looking data that shows the Fed is still kicking the can down the road with a blindfold on.

Reporting for Duty

Let’s have a look at a couple of reports that came out yesterday that show the true story …

ISM Manufacturing

The Institute for Supply Management’s July Purchase Managers Index (PMI) fell a hair to 52.8 from 53, which was slightly above estimates, but still the lowest since June 2020.

New orders fell to 48 and is now below 50 for a second month.

At the same time orders are slipping, inventories are rising, both at the manufacturer level and for customers.

ISM reported, “panelists are increasingly concerned about excessive inventories and continuing record-high lead times. Employment activity remained strongly positive in spite of the uncertainty with new order rates.”

Remember, as we watch the employment data now, it always lags as companies don’t just start firing people on the signs of a slowdown. 

They first slow hiring,  and initial unemployment claims data at an eight-month high is showing signs of weakening in the labor market, for sure. 

Trouble Brewing in the Restaurant Sector

Alignable’s July rent report that polls 3,553 small business owners shows that many businesses are unable to pay their rent. These small businesses include transportation (trucking companies & car services), restaurants, retail shops, and beauty salons. 

Rent hikes, labor costs and the ongoing labor shortage, the high price of gas, and reduced consumer spending are all combining to create economic instability.

Now, these unfortunate events are happening as the Fed continues to raise rates and drain liquidity from the markets …

Remember also that in September the Fed will double the amount of funds removed from the financial system via quantitative tightening (QT), moving from $47 billion to $95 billion … 

The market headwinds are strong and will get stronger. It may be a good week to take profits from the impressive relief stock rally over the past few days. 

Bring It Home

The market to continue watching is bonds. Long bond yields continue to come down signaling economic troubles ahead. 

The US 10-year note was down another .06% on Monday, as the 2-year/10-year curve spread inverted another 5 basis points to -.30% (see below).

The curve is now more inverted than it was prior to the 2008 recession and the 2020 recession.

Although the government says the US can avoid recession …

I guess when you are always looking in the rearview mirror you never see what’s coming at you. 

Live and Trade With Passion My Friend,

Griff