Since Powell shocked the world with an unexpectedly hawkish speech last week, the market has been struggling to guess just how much worse a tighter Fed is going to be for the economy.
As a first pass, the market has decided that it looks a bit scary: most risk assets are down. Meanwhile, the dollar continues to trade very strong in the currency markets.
A strong dollar and weak commodity markets are classic symptoms of tight money. Commodities (especially Dr. Copper) are widely considered to be canaries in the inflation coal mine; when the Fed is tight, commodities almost always suffer.
What follows is a collection of my favorite dollar/commodity charts updated for today’s prices. If the Fed continues on the inflation warpath, commodities are in trouble. But the fed ought to be seeing a clear message in these charts: commodities have already broken to the downside after a strong inflationary runup.
The implication as I see it is that the Fed is already pretty tight and has probably broken the back of inflation. Plus, with the dollar so strong it’s hard to see how the general price level can continue to rise at an unusually rapid pace; inflation by definition is a loss of a currency’s purchasing power. That’s just not happening in the sensitive commodity markets. Moreover, real estate activity has measurably softened, with 30-yr mortgage rates back up to 6%.
Message: The Fed has pushed up interest rates and the dollar to the point that demand for homes and commodities has taken a beating. This is how the Fed fights inflation. They don’t need to do too much more, and they most certainly don’t need to crush the economy or put people out of work to get the inflation rate down.
Not the strong, twenty-year correlation between the strength of the dollar and raw industrial commodity prices (Chart #1). I’ve inverted the value of the dollar to emphasize that a rising dollar almost always coincides with falling commodity prices. The last time the dollar was this strong commodity prices were only about half of what they are today.
It’s a similar story for other commodity prices, as shown in Charts 2-7:
As Chart #8 implies, real estate has almost overnight become extremely expensive, given the huge runup in mortgage rates. This rates as one of the biggest shocks to the real estate market that I can remember.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.