Today the Services PMI for January dropped to 49.7 which indicates that services are now contracting. In addition, existing homes sales declined 5% M/M and consumer sentiment came in at 64.7 vs. expectations of 67.8.
January retail sales declined a disconcerting .8% last week and the Q4 GDP report weakened to 2.3% from over 3% the prior quarter with the critical investment component dropping 1.1%. The old economy is entering into a recession with both commercial and residential investment contracting as is normal during a Fed tightening cycle. Very strong tech investment is an offset that could keep the US out of a near term recession until the Fed acts.
Weakness in the old economy has been driven by the sell off in the 10-year treasury to a 4.8% in response to harsh Fed rhetoric causing the 30-year mortgage rate to rise above 7%.
We continue to believe that the Fed’s policy framework is very dangerous as they use a price index that has a two year lag and pursue a 2% target that is too low and led to the Great Financial Crisis. Real time CPI, using market prices for rents, is already tracking below the Fed’s 2% target at 1.8%. Inflation is exclusively caused by excessive monetary growth, buy the money supply (M0) has shrunk 5% Y/Y indicating we may enter a deflation if the Fed does not act. If the Fed does not cut rates in 2025 the US almost certainly will enter recession in 2026.
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