July 25, 2022

Market Update

General Economy

Economic activity is slowing in the U.S. and Europe. The composite US purchasing managers index fell to 47.5 in July (from 52.3). The drop in services was the biggest fall since May 2020. The rising costs of gas, food, and rent are prompting consumers to spend more on essentials and pull back on discretionary services.


  • Economists now put the chance of a recession in the next year at 49%, up from 44% last month.
  • The price of copper is down 26% from the beginning of June and 32% since the end of March.
  • On the bullish side, inventories are relatively low – half of what they were five years ago.
  • Roughly half of US land is used for agricultural production. Now, solar companies are buying farmland (or leasing it). We could lose a lot of production. This is mostly happening in Texas and Oklahoma. But these two states represent about 25% of planted acres of wheat in the US.
  • Investors are also buying farmland as an inflation hedge. The Chicago Fed said agricultural land values in the region surged 23% in Q1 YoY as investors bought land.
  • Currently, in some areas, the cost of hay is 5X normal.


The Fed is going to raise rates 75 bps (not 100 bps). Fed Gov. Chris Waller said that 75 bps is huge and you don’t want to overdo it. KC Fed Pres. George said that the Fed doesn’t want to raise rates faster than the economy and markets can adjust.

If inflation proves more stubborn than markets are pricing in, nominal and real rates will likely have to go much higher. This is the first tightening cycle since the early 1990s when inflation started well above the Fed’s objective. To push it down would require positive real rates.


  • Forward guidance got us into trouble – we promised to keep rates low for too long and to continue to do QE for too long.
  • Forward guidance always creates risk. Remember that it is designed to push markets away from what they naturally assume the Fed will do.
  • Current guidance is that the Fed will keep raising rates until they know that prices are coming down.


Commuting-fuel-use accounts for ~30% of gas consumption. Now, more people have the ability to work from home. A Census survey conducted over the 13 days ended April 11, showed an estimated 67.3MM people worked from home at least once a week. This rose to 69.7MM in the 13 days ended June 13. In that time, the price of gas had increased from $4.13 to $4.94.


  • Natural-gas futures have jumped 48% this month to over $8. This is still more than $1 off the 14-year high
  • Coal prices are about triple what they were a year ago.
  • In the past, if gas prices rose too high, utilities would turn to their coal plants. But the US power sector has retired about a third of its coal-fired generating capacity since 2010
  • Power producers are demanding large quantities of gas and coal to generate enough electricity to run air conditioners.