Last Week This Morning
The market has a 100% probability of a hike at the June 13th meeting, which would imply LIBOR around 2.15%. There’s even a 26% probability the Fed hikes 0.50% instead of 0.25%. We view that as a huge overstatement, but perhaps the take away is that the market is buying what the Fed is selling when it comes to rate hikes.
Expect LIBOR to resume it’s climb this week as we get within the 30 day window of the next FOMC meeting. Over the next month, LIBOR will likely climb to 2.15%-ish barring a sudden change to rate hike probabilities.
The 10 Year Treasury is still flirting with 3.00%, but that’s really a psychological level. The key technical level (like 2.62% before it) is 3.05%-ish.
Oil and Recessions
In four out of the last five recessions, oil prices doubled ahead of the economic slowdown.
Here’s a graph illustrating the recessions since the 1980’s. There appears to be a correlation between oil prices doubling in less than 18 months and recessions.
The notable exception was the post-crisis period when oil climbed from $47 to $106 and no recession ensued. What gives?
There is a LOT going on in the following graph, but let me try to highlight the takeaway. Focus on the red ovals.
In my state school vernacular – when one increased but not the other, no recession.
When both increased, recession.
Bottom Line – when the cost of money and the cost of energy increase, a recession follows.
Both are climbing right now.
Bonus Bottom Line – in previous recessions, oil doubled (or more) and Fed Funds increased by 2.00% (or more). Thus far,
This suggests current levels are flashing warning signs, but we aren’t in Recession Lead Pipe Lock territory…yet.
But with an FOMC suggesting it will hike Fed Funds to 3.00%, Iranian sanctions pushing up oil prices, and a flattening yield curve, the stage is being set.
Relatively quiet week on the data and Fed-speaker front. Perhaps the consumer spending data will be the headline given the impact oil prices can have on disposable income.