A Wartime Calm before the Storm
Recession keeps slowly advancing even as inflation retreats, but the retreat may be a ruse, as might be Iran's calm ahead of its promised attack on Israel.
We’ve got two things to cover today—the latest news on the economy because that is primarily what my site is about and the conflict in Israel. The parts are labeled so you can easily skip to the part you’re most interested in. Both appear to be in a slight lull compared to what was anticipated, but don’t count on the lull lasting.
The recessional march continues apace
Signs of recession keep accruing at the business level, even if not in reported GDP: Home Depot is slashing forward expectations as another home building-materials store slashes stores. LL Flooring will shut 94 of its 442 stores.
[Home Depot] CFO Richard McPhail said consumers have been undergoing a "deferral mindset" since the middle of 2023…. They're deferring because of a sense of greater uncertainty in the economy.
The air is troubled as it is before a storm. There’s a breeze but the temperature is cooler than the summer heat, and hot and cold sometimes mean a storm.
The gales from retail that are carrying us deeper into recession have been brewing for a long time and are much broader than just trouble in construction materials due to severe declines in construction. It’s retail-industry wide.
LL Flooring is the latest to shutter stores this year, with the US on course to lose nearly 8,000 physical locations by the end of 2024.
For example, Macy's is closing 150 shops - a third of its total - while Dollar Tree is shutting 1,000 and drug store Rite Aid will close almost 800.
There were almost 2,600 store closures in the first four months of 2024.
Of course, the housing ice dam is intensifying the hit to retailers like Home Depot and LL Flooring. Regardless, the retail apocalypse is broad based and continues with no end in sight at present.
Inflation losing pressure?
Inflation, on the other hand, gave the Fed a bit of a break today on the producer side of the equation. Producer costs have been ramping up, and that is one reason I’ve said we will likely see a resurgence in inflation by the end of summer. Producer prices almost always pass down the pipeline to consumers.
Today’s dip was touted in the news as giving the Fed the break it needs to see in order to make interest-rate cuts in September, and that could be the case as I don’t know precisely when inflation will make it down the pipe to CPI because the lag times are variable, and retailers are now having to take the hit out of their profit margins as consumers are fighting back. Plus, a lot of what is being purchased by retailers from producers at this time of year isn’t intended to hit the shelves until the holiday season. Consumer price adjustments occur when the items affected by producer price increases hit the shelves, not when the producer changes the price.
However, the nod in Powell’s favor is not that significant unless it starts a new trend down; but, as you can see, there have been bigger nods on the road uphill already, which didn’t stop producer prices from continuing to rise:
I remind everyone there are no straight lines in economics. Not for long anyway, and a single dip doesn’t reverse an upward trend that has been solidly established for a year now, though it could turn into a new trend if it followed with a couple more moves down, but it is far from clear that it will. For now, you can see that it leaves the pressure from producers price increases still on the table at the second-highest level they’ve held since last summer. So, it did not bring the inflation rate on the production side down by much.
If inflation continues to keep its head down into September, there is a strong likelihood the Fed will finally make that first rate cut, and there is a fair chance inflation may do that, especially since the government is in charge of the numbers, and this is an election year. That is because there is a good chance that the two main inflation drivers I’ve said would be in play—housing prices and oil— won’t deliver in time to affect that meeting—housing because it has such a long lag time, though actual prices have been rising steeply for a year on a national average; and oil because it went up, and recently took a small respite. However …
Energy prices picked up MoM….
Final demand goods: Prices for final demand goods rose 0.6% in July, the largest advance since a 1.1- percent jump in February….
Nearly 60 percent of the broad-based increase in July can be traced to the index for final demand energy, which moved up 1.9%.
So, energy has done what I anticipated for the summer, but just not quite as intensely. The service sector is what held the overall producer inflation rate down. Moreover …
Bullish Positioning In Oil Just Hit An All-Time Low, Signaling Price Rebound
… The extremely bearish positioning in Brent and other contracts has created a potentially attractive entry point for new bullish long positions – provided a slowdown is averted, or a geopolitical shock emerges sparking a furious short squeeze.
Front-month Brent futures prices have bounced back above $80 per barrel from a low of just $75 per barrel at one point on August 5.
Which is to say oil isn’t done delivering yet, and it’s already heating back up.
Looking ahead, Goldman expects Brent prices to continue to recover further to the mid-80s as "financial demand for oil rebounds from its record low (although CFTC's latest report only captures positioning up till last Tuesday), with low positioning historically often foreshadowing solid returns in the next 3 months"
Remember what happened in our last big inflation fight: Fed Chair Paul Volcker saw good reason to think inflation had come down enough that he could afford to make some rate cuts to ward off a recession. This resulted in a rapid resurgence in inflation to even higher levels than the previous high, and the need to fight inflation even harder resulted in a double-dip recession.
The Iranium Reaction
At least Iran withheld from a rumored attack on Tisha B’Av, but today’s reports say it has not agreed to stand down and will only delay its retribution until hostage negotiations are done and, even then, only if Israel does nothing in Iran’s eyes to stall hostage negotiations.
Only a ceasefire deal in Gaza stemming from hoped-for talks this week would hold Iran back from direct retaliation against Israel for the assassination of Hamas leader Ismail Haniyeh on its soil, three senior Iranian officials said.
One of the sources, a senior Iranian security official, said Iran, along with allies such as Hezbollah, would launch a direct attack if the Gaza talks fail or it perceives Israel is dragging out negotiations. The sources did not say how long Iran would allow for talks to progress before responding.
Iran has chosen to deploy its threat of retaliation as a gun to Israel’s head during hostage negotiations, getting what it can out of the threat of attack before making the attack. The talks are scheduled for Thursday.
It appears efforts by the West to talk Iran off the ledge of an act that will be as suicidal for Iran as damaging for everyone else have not gone anywhere, other than maybe this slight stall in order to leverage the talks and also avoid throwing them into the dirt:
"The Iranians never subordinated their strategy and policies to the needs of their proxies or protégées,” Litvak said. “An attack is likely and almost inevitable but I don't know the scale and the timing.”
On the other hand,
Iran-based analyst Saeed Laylaz said the Islamic Republic's leaders were now keen to work towards a ceasefire in Gaza, "to obtain incentives, avoid an all-out war and strengthen its position in the region."
The White House also does not appear to believe its efforts to talk Iran down or drive them down with heavy military threats have gone anywhere:
The White House too believes an attack is imminent or at least within "days" away. At the same time a senior Israeli official told Axios: "The Iranians openly signal (on the ground) their determination to carry out a significant attack in addition to their public statements that the attack will exceed the one they carried out in April."
The official additionally observed that "Iranian public statements do not reflect any retreat."
Zealot fever
The threat of war, however, has certainly excited the zealots. Even some in the Israeli cabinet, who want the end-times war to begin, are going dangerously beyond legal protest to foment a fight:
Israel's hardline and very controversial National Security Minister Itamar Ben Gvir has stirred Palestinian and international outrage once again, this time by by leading prayers marking a Jewish holiday inside the Al-Aqsa Mosque compound in Jerusalem, accompanied by over 1,000 Israeli settlers.
Ben Gvir is acting as a flame thrower in a dynamite storeroom, saying essentially, “We dare you!”
Israeli authorities have long had a ban on non-Muslims conducting religious events or displaying religious symbols inside the compound, even though they are permitted to visit the mosque, which is Islam's third holiest site behind Mecca and Medina….
Ben Gvir's entry happened under the protection of Israeli police. At the same time, local media showed Muslim worshippers being blocked from seeking to access the mosque while the Jewish settler groups were present. Past events like this led to outbreaks of severe clashes between Palestinians and police, and violence between the Israeli and Muslim groups….
This happened on the Jewish mourning day of Tisha Be’Av which commemorates the destruction of the ancient temple.
One such outbreak happened when Prime Minister Ariel Sharon walked through the compound. He did not bring religious affronts into his actions that I recall, and it still started the Intifada. So, is this what Israel needs right now as it seeks to put down Hamas—a whole lot more fire in the dynamite storeroom to draw in a lot more Muslims from other nations to defend their holy sites and join Hamas’s fight, turning this into a much larger, more intense war? Gvir obviously thinks so.
Some reports have put the number of Jews who breached the compound alongside Ben Gvir at over 2,200. They were filmed performing Talmudic rituals once inside, while police kept any onlooking Palestinians from getting close to the group.
Ben Gvir subsequently released a video on social media sites of him issuing declarations that Israel will win the war in Gaza while standing just outside Al-Aqsa Mosque.
Defeating violent Hamas terrorists that attack you by slaughtering civilians who were just having a party is one thing, but clearly Gvir wants to inflame a religious war with all of Islam, not just win a territorial war against Hamas, given that he chose to put on his big public show right in front of Islam’s most sacred sites and conduct religious acts that are an illegal affront under Israeli law in that location (as a member of the official government no less).
Clearly, there are people in Israel who want religious war, even within the government, who are turning the flame thrower up as hot as they can to try to start one. It’s hard to see how Israel won’t get such an all-out war with the heat constantly being turned up and now focused at religious structures in violation of Israeli law intended to avert such intensified conflict, especially when Israel’s police helped stage the event by keeping Palestinians out while letting the Gvir group in to do as it pleased.
The United States and others could get drawn into the religious war these zealots inflame. There are, of course, many calmer heads among Jews who want no such thing, even though they believe Israel needs to end Hamas once and for all. Unfortunately, enflaming the present situation into a religious war will make it all the more difficult to defeat Hamas by rallying tens of thousands of additional Muslims into the action on Hamas’s side.
Video: Unpacking the Market Crash: Interview by Alex Newman with David Haggith
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