Scorching Hot Summer

Good Afternoon,

It’s an interesting mix of news this week, some good, some bad, and some HOT. Markets think the Fed is going to back down, the GDP outlook looks scary, and heat waves are rocking the US. It’s been a BLAZING few weeks, and we’re not just talking about inflation.

This week, we’re diving into the Fed’s outlook, the possibility of a recession, and what this summer’s heat waves mean for all of you.

In the News

Interesting week this week. Markets think the Fed is backing down and inflation projections look promising, but markets are still almost certain that we’ll have a recession on top of this summer’s heat waves.

Market forecasts from the week of 07/22.

The Fed Is Backing Down

Looks like the only thing that’s “transitory” is JPOW’s ideology.

Last Wednesday’s inflation report surprised markets with higher-than-expected 1.3% month-over-month inflation (9.1% year-over-year). In response, markets went bananas. Various Fed members came out in favor of even more drastic 1% hikes at their next meeting to tame inflation. Kalshi’s markets immediately changed their estimated likelihood of a 1% hike to ~60% (up from ~9%)!.

This shift didn’t last long. In the face of a weakening economic outlook, more tame inflation projections for the rest of the year, and other Fed members calling for a more reserved response, markets now believe the Fed has backed down. They’ve dropped their estimates of a 1% rate hike in July from ~60% after the last inflation print back to 9%.

Has the Fed finally been tamed? We shall see.

Warning: Economic Wasteland Ahead

Amid the searing-hot inflation print, expectations around the Fed’s response and low consumer sentiment shows that markets are convinced we’re going to get negative GDP growth.

An economy is kind of like a collective dream - as long as everyone believes in it, it works. The problem? People have stopped believing.

The instant the music stops and consumer sentiment drops, money stops flowing through the economy. Add another set of drastic rate hikes on the horizon and high peak mortgage rates, and you’ve got a recipe for disaster.

Put your seatbelts on, folks. Markets have a strong belief that there will be a recession (defined as two consecutive quarters of negative GDP growth) this year – Kalshi’s prediction markets are giving it an ~82% chance. .

Looks like we might end up going right from a pandemic-fueled nightmare into a recession-fueled nightmare. Hopefully JPOW backs off, and we can all wake up soon.

It's Getting Hot in Here

Heat waves have been rocking the US, and the downstream consequences are quite scary.

In the US, 40 million people have been placed under heat risk in the central and southwestern parts of the country. CNN reports that 20% of the country will likely see temperatures of 100°F or higher this week.

It’s the same around the world - across the pond, Europe is experiencing record temperatures. The NYT reports that the UK declared a state of emergency as they broke their record for highest temperature, at 104.4°F.

Why does it matter? Heat waves cause

• Out-of-control electricity bills

• Wildfires

• Severe droughts and depleted water reservoirs

Specific areas get hit the hardest. The one we’re concerned about right now? Lake Mead, the country’s largest reservoir.

The water levels in Lake Mead have dropped nearly 10 feet in the last two months, standing at 27% of its total capacity. This matters because different states have different access to Lake Mead water rights. Many states that rely on Lake Mead and the Colorado River have been forced to impose water cuts.

Kalshi’s markets are currently predicting significant cuts in Lake Mead average water levels again this year.

They’re also giving 2022 a 10% chance of being the hottest year on record ever. Better stock up on sunscreen before it becomes as scarce as pandemic-era toilet paper.

The world’s on fire, inflation is up, and GDP is down - but at least the Fed is finally getting the message and trading its bazooka for a rifle. Always a silver lining, right? 

Lit's Pick

This week, we are buying the “Yes” for a new Covid-19 wave by this fall for $0.50. There seems to be a new Greek-letter variant every other month.

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.