Recession calls are getting louder. If history is any guide, the bust is coming. Good news for gold! An economic hurricane is coming. Brace yourselves! This is at least what Jamie Dimon suggested last month. To be precise, he said: “Right now, it's kind of sunny. Things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road, coming our way. We just don’t know if it's a minor one or Superstorm Sandy.” When JP Morgan Chase’s CEO is painting such a gloomy picture, you know that something serious is going to happen! Indeed, both on Wall Street and Main Street, calls for a recession are becoming more common and louder. According to Markit, credit default swaps have nearly doubled so far in 2022, surpassing the pre-pandemic levels. The higher their prices, the greater the chance of default in the eyes of investors. The high yield bond market is also showing that worries about the state of the economy are rising. As the chart below shows, the spread between so-called junk bonds and Treasuries surged from about 300 to more than 500 basis points in 2022. It means that the risk premium – a premium that investors require to hold risky bonds – has risen considerably this year, to the heights of the coronavirus crisis. The implication is clear: market sentiment is deteriorating and confidence in the economy’s strength is declining. The widening credit spreads are usually a good harbinger for the gold price. Not only investors have become more worried recently. As the chart below shows, US consumer sentiment as measured by the University of Michigan dived below 60, to a level not seen since the Great Recession and, earlier, the recession of 1980. Are these concerns justified? I’m afraid so! The Atlanta Federal Reserve’s GDPNow tracker is now pointing to an annualized real GDP growth of just 0% for the second quarter. Atlanta, we have a problem! To understand what is happening right now, it would be useful to recall the Austrian business cycle theory. According to the Austrian school of economics, there is a phase of boom triggered by the increase in the money supply in the form of credit expansion and the policy of low interest rates that stimulate borrowing and investment, and then the inevitable bust. The bust is imminent as a credit-based boom results in aan imbalance between saving and investment and widespread malinvestments. So, when the credit expansion is slowing down and interest rates are rising, it turns out that many investment projects were not justified by the fundamentals and could be started only because of artificially lowered interest rates and excessive lending. When the bubble bursts, a recession unfolds. Now, let’s apply this theory to the present situation. In a response to the coronavirus pandemic, governments all over the world panicked and introduced costly lockdowns. To compensate for the losses, the Fed slashed the federal funds rate to almost zero and boosted the monetary base by 40% in just two months. But what distinguished this episode from the previous monetary injections is that the Fed introduced many liquidity programs for Main Street. As a consequence, in the two years after the outbreak of the pandemic, the broad money supply M2 rose by more than 40%, while bank credit increased by about 20% (see the chart below). As the bulk of this newly created money went to entrepreneurs, they started new investments. However, because input supply had not increased, producer prices soared (as shown in the chart below, producer prices have risen 40% since the pandemic), forcing entrepreneurs to borrow money in the market, driving up bond yields and causing a yield curve inversion. At some point, when interest rates increase too much, entrepreneurs will have to abandon or seriously restructure their projects, triggering a full-scale recession. We are already witnessing some tech companies firing workers in an attempt to reduce costs. What does it all mean for the gold market? Well, the bust is coming, or, actually – as Kristoffer Hansen points out – the crisis is already upon us. This might be surprising as, typically, business cycles are much longer, but the 2020 monetary impulse was an unusually large but one-time event. This is good news for the yellow metal, which shines during financial crises. Indeed, in the recessionary year of 2008, gold gained 4%, although it initially lost due to fire-sales, and it rallied even more impressively in 2009 and subsequent years. So far, I would say that we are still in 2007, when the stock market has already entered the territory but the real economy hasn’t fallen into recession yet. However, this is likely to change in the upcoming months. If history is any guide, gold will ultimately come out stronger...

All eyes will be on the Federal Reserve meeting next week. A triple-barreled rate increase is essentially locked in, so traders will put more emphasis on Powell’s commentary and the upcoming GDP report that will reveal whether America is in a technical recession. Over in Europe, there’s another round of inflation data coming up, although the euro might care more about the unfolding political crisis in Italy. 

All eyes will be on the Federal Reserve meeting next week. A triple-barreled rate increase is essentially locked in, so traders will put more emphasis on Powell’s commentary and the upcoming GDP report that will reveal whether America is in a technical recession. Over in Europe, there’s another round of inflation data coming up, although the euro might care more about the unfolding political crisis in Italy. 

Summary United States: Housing Slump Underscores Rising Risk of Recession Higher mortgage rates continue to drag on housing activity. The NAHB Housing Market Index plunged 12 points to 55 in July. June brought a 5.6% drop in existing home sales as well as a 2.0% decline in housing starts. Initial jobless claims rose to 251K during the week of July 16. The Leading Economic Index (LEI) slipped 0.8% in June, the fourth straight monthly drop. Next week: Durable Goods (Wed.), Q2 U.S. GDP (Thurs.), Personal Income & Spending (Fri.) International: ECB Exits Negative Interest Rates The ECB delivered a larger-than-expected 50 bps Deposit Rate increase, exiting its negative interest rate policy and taking the Deposit Rate to 0.00%. The other key policy interest rates were also lifted by 50 bps, taking the refinancing rate to 0.50% and the marginal lending rate to 0.75%. Next week: Japan (Tokyo) Inflation (Thurs.), Central Bank of Colombia (Fri.), Eurozone Q2 GDP (Fri.) Interest Rate Watch: The FOMC to Deliver Another Jumbo 75 bps Hike The blistering June CPI report raised the chance that the FOMC could deliver a 100 bps hike at next Wednesday's meeting. However, with data since then showing the economy continues to cool and notable hawks signaling a smaller increase should be adequate, we look for the FOMC to hike a still head-turning 75 bps. Credit Market Insights: Stronger Dollar Spells Potential Trouble for Emerging Market Debt Over the course of 2022, but particularly during the past few months, the U.S. dollar has broadly strengthened. Local currency depreciation could mean potential trouble for governments that have a sizable percentage of their sovereign debt denominated in U.S. dollars. As vulnerable countries struggle with potential repayment issues, economic growth across the emerging and developing world could slow sharply, while the probability of default could spike across the entire spectrum. Topic of the Week: Power Struggle: European Heat Waves Strain an Energy-Starved Continent The second heat wave of this summer swept through Europe this week, extending as far north as the U.K. and causing wildfires in France, Spain, Portugal and Italy. The intensity of the heat wave, with temperatures reaching a record high of 104°F in the U.K., has upended life and further strained a continent already dealing with an energy crisis. Download the full report

Volatility was the winner overnight, with a multitude of data points and events leaving market price action messier than a teenager's bedroom. The European Central Bank surprised markets by lifting policy rates by 0.50%, ending over a decade of negative interest rates. The Euro has already been rallying, but its gains were tempered by the collapse of the Italian government, and post the ECB meeting, German/Italian bond spreads started widening noticeably. The ECB’s Lagarde said policy decisions would be made on a meeting-by-meeting basis going forward, tossing their forward guidance out. Perhaps more importantly, Russian gas started flowing back down the Nord Stream 1 gas pipeline yesterday, albeit at flows resembling the 40% of capacity before it closed for maintenance. Still, when it comes to Europe and energy, any news is good news as fears had risen that Russia would leave it turned off. EUR/USD had already started rallying on this news, which was likely the major reason that oil prices fell overnight in another 5.0% intra-day range session. European equities were far more mixed, with some stark winners and losers. For that, we can thank the Italian political situation, widening North/South bond spreads, and the ECB’s 0.50% rate hike. In the US, a multi-month high for US Initial Jobless Claims and a soft Philly Fed Business Conditions Index spooked bond markets and saw US yields move quite a bit lower overnight. The US curve now looks bowl-shaped after US 10-years fell by over 15 basis points. That saw the US Dollar weaken as well, as US recession fears also ramped up. I must say, Initial Jobless Claims rising by 7,000 to 251,000 does seem like clasping at straws. Wall Street liked what they saw, rallying powerfully once again overnight. Lower bond yields and some solid earnings results keep sentiment perky during the main session. That has changed a bit after hours after weak Snap. Inc results saw their stock price plummet by 25%. That dragged down the other social media-esque giants. As Meta found out earlier in the year, markets will severely punish richly valued tech stocks at the first sign of trouble, and there is now some risk to the broader equity markets from the FAANGS yet to report. This morning, we have seen Australian and Japanese Manufacturing and Service PMIs come in on the soft side, along with Japanese Inflation, which edged lower in June YoY to 2.40%. We have a bunch of S&P Global PMIs still to come for the European heavyweights, the Eurozone, and the US today. It looks like they will all have downside risks for obvious reasons, but I am not sure it will be enough to deter the FOMO gnomes of Wall Street. I will be covering my last FOMC meeting next week, and it seems likely that this will be the defining moment for markets in what has been a tumultuous month. 0.75% or 1.0% I know not, although my gut says 0.75%. The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks. Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can’t see how that is a productive environment for equities, and that’s before the rest of big-tech reports quarterly earnings. That said, the technical pictures across the equity and currency space suggest we have more room for a further retracement. AUD/USD and NZD/USD have broken up out of falling wedges, with GBP/USD about to do so. The S&P 500 is approaching resistance at 4,020.00, as is the Dow right here at 32,030.00, although the Nasdaq’s lies far away still at 13,500.00. Failure of 106.40 by the dollar index will signal a much deeper correction lower, and the slump in US yields overnight is setting up USD/JPY for a serious culling of long positions. Two warning signs remain for me. One is that the US Dollar moves lower has all but passed the Asia FX space buy. Most USD/Asia pairs remain at or near recent highs, which in some cases, are record highs. We likely need to see a much bigger fall in US yields and/or oil prices to change that. I can’t see the Fed being so happy to see the US yield curve slump at this stage in the process, though. The second is gold. Gold’s price performance has been appalling in July, remaining at multi-month lows no matter whether the US Dollar or US yields have rallied or fallen. The US Dollar usually rallies during a recession, part of the “dollar smile” complex. Gold seems to be telling us that we call “peak dollar” at our peril. One news event that may lift sentiment in Asia today is an announcement...

Volatility was the winner overnight, with a multitude of data points and events leaving market price action messier than a teenager's bedroom. The European Central Bank surprised markets by lifting policy rates by 0.50%, ending over a decade of negative interest rates. The Euro has already been rallying, but its gains were tempered by the collapse of the Italian government, and post the ECB meeting, German/Italian bond spreads started widening noticeably. The ECB’s Lagarde said policy decisions would be made on a meeting-by-meeting basis going forward, tossing their forward guidance out. Perhaps more importantly, Russian gas started flowing back down the Nord Stream 1 gas pipeline yesterday, albeit at flows resembling the 40% of capacity before it closed for maintenance. Still, when it comes to Europe and energy, any news is good news as fears had risen that Russia would leave it turned off. EUR/USD had already started rallying on this news, which was likely the major reason that oil prices fell overnight in another 5.0% intra-day range session. European equities were far more mixed, with some stark winners and losers. For that, we can thank the Italian political situation, widening North/South bond spreads, and the ECB’s 0.50% rate hike. In the US, a multi-month high for US Initial Jobless Claims and a soft Philly Fed Business Conditions Index spooked bond markets and saw US yields move quite a bit lower overnight. The US curve now looks bowl-shaped after US 10-years fell by over 15 basis points. That saw the US Dollar weaken as well, as US recession fears also ramped up. I must say, Initial Jobless Claims rising by 7,000 to 251,000 does seem like clasping at straws. Wall Street liked what they saw, rallying powerfully once again overnight. Lower bond yields and some solid earnings results keep sentiment perky during the main session. That has changed a bit after hours after weak Snap. Inc results saw their stock price plummet by 25%. That dragged down the other social media-esque giants. As Meta found out earlier in the year, markets will severely punish richly valued tech stocks at the first sign of trouble, and there is now some risk to the broader equity markets from the FAANGS yet to report. This morning, we have seen Australian and Japanese Manufacturing and Service PMIs come in on the soft side, along with Japanese Inflation, which edged lower in June YoY to 2.40%. We have a bunch of S&P Global PMIs still to come for the European heavyweights, the Eurozone, and the US today. It looks like they will all have downside risks for obvious reasons, but I am not sure it will be enough to deter the FOMO gnomes of Wall Street. I will be covering my last FOMC meeting next week, and it seems likely that this will be the defining moment for markets in what has been a tumultuous month. 0.75% or 1.0% I know not, although my gut says 0.75%. The statement will be crucial and, depending on how it plays out, could stop what I consider a bear market rally, in its tracks. Inflation remains and will remain stubbornly high, geopolitical risk abounds, growth is slowing around the world, and recession risks are rising. I can’t see how that is a productive environment for equities, and that’s before the rest of big-tech reports quarterly earnings. That said, the technical pictures across the equity and currency space suggest we have more room for a further retracement. AUD/USD and NZD/USD have broken up out of falling wedges, with GBP/USD about to do so. The S&P 500 is approaching resistance at 4,020.00, as is the Dow right here at 32,030.00, although the Nasdaq’s lies far away still at 13,500.00. Failure of 106.40 by the dollar index will signal a much deeper correction lower, and the slump in US yields overnight is setting up USD/JPY for a serious culling of long positions. Two warning signs remain for me. One is that the US Dollar moves lower has all but passed the Asia FX space buy. Most USD/Asia pairs remain at or near recent highs, which in some cases, are record highs. We likely need to see a much bigger fall in US yields and/or oil prices to change that. I can’t see the Fed being so happy to see the US yield curve slump at this stage in the process, though. The second is gold. Gold’s price performance has been appalling in July, remaining at multi-month lows no matter whether the US Dollar or US yields have rallied or fallen. The US Dollar usually rallies during a recession, part of the “dollar smile” complex. Gold seems to be telling us that we call “peak dollar” at our peril. One news event that may lift sentiment in Asia today is an announcement...