Rate Hike Bazooka

Good Afternoon,

Scary news this week, scary prospects on the horizon. We had a searing hot inflation print, and the combination of more rate hikes plus a poor GDP outlook is alarming. Inflation is supposed to come down moving forward, but we’ll be in a world of pain for a while.

Get ready - This week, we’re diving into inflation data, the GDP outlook, and how Fed rate hike expectations have changed to help you understand what’s coming.

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In the News

Tough week this week. The inflation print was painful, GDP projections were even worse, and markets think that the Fed has something to prove.

Market forecasts from the week of 07/15

Inflation in the Clouds

Every time we think that it’s too late to make another JPOW “transitory” joke, the bit keeps getting funnier.

Wednesday’s inflation report surprised markets with higher-than-expected 1.3% month-over-month inflation (9.1% year-over-year). In comparison, wage growth was only 5.1% year-over-year, which means that pay raise you just received might actually be a salary decrease.

Looking forward, the outlook is a bit more promising. Gas prices are falling, most food prices have returned to pre-war levels, and metal prices have come down drastically. Also, no month after June is predicted to have greater than 0.6% month-over-month inflation.

Inflation figures were slightly higher than market projections last week, when Kalshi’s prediction markets were giving them a ~50% chance of being at or above 1.0%.

It looks like your pocketbooks just might be safe moving forward.

Inflation Up, GDP Down

After the inflation print and new expectations around the Fed’s response, markets are still pretty certain we’re going to get negative GDP growth, albeit less certain than before.

Sad consumers? Supply chain shocks? JPOW with a bazooka? Bye bye, economy.

As prices rise, consumer sentiment wanes, and everyone thinks another drastic rate hike is on the horizon - things look bleak.

Start bracing for impact. Markets are all but certain now that there will be a quarter of negative GDP growth this year – Kalshi’s prediction markets are still giving it an ~85% chance. Interestingly, this is actually lower than last week - it looks like markets are pricing in that lower inflation -> overcorrection by the Fed will force the Fed to retreat at some point. .

Growth makes the world go round. Growth = nice things. No growth? No more nice things. Jobs numbers are the last thing keeping us afloat right now, but in a low growth economy, even those will take a hit eventually. Based on market predictions, we have even more negative news on the horizon, so batten down the hatches and brace for a long winter this year.

Printer --> Bazooka

JPOW finally stopped printing and now he’s itching for an (inflation) fight.

In May, after a hot inflation print, the Federal Reserve went back on their previously drawn line in the sand, 0.5% rate hikes, and increased rates by 0.75%, the highest increase since 1994.

I guess even Fed chairs can have commitment issues.

Now? It looks like they’re about to do it again. The Fed discussed rate hikes in the range of 0.5% - 0.75% after the last inflation print, but markets are now pricing in a rate hike of 1% as more likely than not! This comes on the back of a scorcher June inflation print that markets believe will force the Fed to up the ante.

The Fed has deemed inflation public enemy #1 and has been quite vocal about doing whatever it takes to fight it. The question now is - how far will they go?

Markets project that they will taper off after the next drastic rate increase, only projecting a 1% rate increase for the entire rest of the year. This makes sense: inflation is slowing down as well, and the Fed has to be worried about hurting the economy right when it is most fragile.

Inflation is up, GDP is down, and the Fed is about to make it all worse. Still, at least it’s summer - going outside doesn’t cost anything. 

Lit's Pick

We are 0-2 on Lit’s Picks so far, shout out to the June inflation numbers for ruining last week’s pick. Anyways, we’re back again for round three. I’m taking a different approach this week and betting “Yes” for $0.71 that the Biden administration will extend the student loan payment pause. 

That's all for today, have a great weekend 🤝

Forecasts powered by Kalshi

As always, these market forecasts are powered by Kalshi, the first regulated prediction market in the US. Trust data, not pundits, and get your forecasts from people with real skin in the game.