EVERYWHERE WE LOOK, CONFIDENCE IS PLUNGING: This doesn’t always mean consumers will hibernate — not all of the 2021 stimulus has been spent — but real disposable income is falling, thanks to gasoline and food price hikes.
COMPOUNDING THE ECONOMIC MALAISE is the Federal Reserve, tightening into a potential recession as Covid makes a dramatic comeback. We reiterate that a 100 basis point rate increase is unlikely next week, but a 75 basis point move is very likely — with more rate hikes to come this fall.
BUT THERE’S LITTLE DOUBT THAT CONFIDENCE IS SHAKY as the economy slows and Covid cases surge. We doubt there will be compliance with new mask mandates in the U.S. — but the Chinese government could crack down, once again, which would dampen global economic growth.
CONFIDENCE IS TERRIBLE in Europe, which faces an unprecedented energy crisis this winter. A truce in the Ukrainian war would be a life-preserver, but neither side appears likely to negotiate any time soon.
THIS WILL INTENSIFY POPULIST ANGER OVER THE WAR: Political leaders — especially Emmanuel Macron and Mario Draghi — are losing altitude as an unprecedented heat wave and drought persists and the Euro plunges, further adding to inflation.
IN WASHINGTON, CONFIDENCE IN JOE BIDEN has plunged. His fist-bump in Saudi Arabia was poorly received in his own party, which is in open revolt against him (and Joe Manchin). The most Biden can get out of Manchin is prescription drug price reform and funding for Obamacare subsidies, both of which are looking possible.
THE CENTERPIECES OF THE BIDEN AGENDA — tax and environmental reform — are now on life support. Green policies could advance in the states and the private sector, and Biden may issue executive orders, but fossil fuels are the big winners as Manchin pulls the plug.
MOST DEMOCRATS ARE FLEEING FROM BIDEN: Rank-and-file Democrats don’t want him to seek another term, and in private there’s speculation about whether he will finish this first term, which still has two and a half years to go. There’s virtually no confidence in Biden in this town.
THIS SOUR MOOD ALSO AFFECTS REPUBLICANS, who are grappling with horror stories about the denial of medical care for rape victims, while congressional hearings seem to confirm that Donald Trump tried to violently steal the 2020 election. The hearings have inflicted significant damage on the GOP.
BOTTOM LINE: This dramatic drop of confidence — over the economy, inflation, Ukraine, U.S. politics, Uvalde, a Covid resurgence, etc. — has to make the Fed reluctant to over-do the tightening. The bond market can smell the malaise; there’s a reason why the 10-year bond yield has slipped in the past week.
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