Mr. Warsh is one unhappy camper this week now that inflation fear has re-emerged and everywhere

Mr. Warsh is one unhappy camper this week now that inflation fear has re-emerged and everywhere. He may not be able to put off a rate hike in September everyone imagined only days ago, although the CME betting odds do not show it—yet.

Yesterday the CME market reversed the probability of a rate hike in September from over 50% to a mere 30.6%. So far today, the probability of a rate hike in September has risen to 34.4%. This is hardly a scream in the dark or as Mr. Yardeni says about the stock/bond situation, not a reason to push the panic button just yet. 

The big global bond sell-off reflects three factors—inflation, excessive government debt, and hyperscalers taking a lion’s share of all the money in the market, some of it from iffy private lenders.

A big chunk of that inflation fear arises from the price of oil. Now that Iran intends to keep the Strait closed until Trump comes to terms, the stalemate could be long-lasting. Whether the oil price goes back up into the stratosphere depends on the ability of the oil gang to continue to find substitute routes and sources—plus China restraining from imports. We even have press reports of the Mexican railroad that would by-pass the Panama Canal.

Trump thinks the stock market is about himself, so any persistence of lower equities will bring some initiative or another. The problem is that Trump is erratic and inconsistent. His remarks are on the edge of incoherence and often over the edge. The antidote may be central banks taking the reins and stating out loud that interest rates must go up, including the Fed. Another idea would be the Europeans saying they are entering some kind of deal to help the US isolate Iran economically, especially if the border countries can be strong-armed to go along (Turkey comes to mind).

Forecast

Yields up, dollar up. War = risk aversion, dollar up. The world may want to sell dollars to punish the US for electing that incompetent clown, but money talks. We expect this retracement to be substantial unless and until we get some serious breakout news. It won’t be a renewed US military attack on Iran until after the mid-terms—will it?

Fun Tidbit: Reuters: “…  Trump's approval rating fell to the lowest level of his presidency with an overwhelming majority of Americans concerned the U.S. war with Iran will last a long time, according to a Reuters/Ipsos poll that​concluded on Monday.”