Pro Perspectives 7/5/22

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July 5, 2022

We had some big swings across global markets today.
It was the “rising likelihood of recession” that received the blame.
For example, we had a steep plunge in crude oil prices today.  That makes sense if you think recession is on the brink (i.e. less demand for oil).  
But as we discussed last week, we’ve likely seen the recession already
The Fed has already successfully killed animal spirits through it’s threats of aggressive interest rate hikes. 
It has already been reflected in the data.  Official GDP for Q1 was negative.  And the Atlanta Fed’s GDP model, which mimics the methods used by the BEA to estimate the government’s GDP measure, is projecting a negative second quarter.  Two negative quarters, is an official recession. 
That said, the big June data from Q2 has yet to be incorporated into the Atlanta Fed model.  The June jobs report will come this Friday.  And then we have June inflation data next week, and housing data the following week.
But we’ve already seen clues on jobs, inflation and housing, via other June economic reports, to safely assume a softening in these forthcoming data points. 
With that, by the end of July, when we see the BEA’s advance GDP number for Q2, we will likely get confirmation that have already seen the recession.
So, why the big swings in markets today?
As we also discussed last week, the drums of war are beating.
Remember, last week G7 leaders met, which rolled into a NATO meetings later in the week. 
And it was an eventful week.
>G7 allies banned imports of gold from Russia.  
>That was soon followed by a Russian debt default (a missed debt payment) — the first default to foreign creditors since 1918.
>Next, NATO announced plans to increase “troops on high-readiness” from 40,000 to 300,000.
>Then the the G7 included in its communique that they would phase out Russian oil, and in the meantime, threatened price caps on Russian oil imports (which would only further limit global supply, and increase prices).
>Finally, Finland and Sweden signed an agreement paving the way to join NATO.
Importantly:  Putin has already said that he will respond (in kind) if NATO were to deploy military and infrastructure in these bordering countries (Finnish land border, and Swedish maritime border). 
Was it a war flashpoint that kicked off the market turmoil today?
It just so happens, that the opening of European markets on Tuesday coincided with the signing of accession protocols by NATO allies, to add Finland and Sweden to NATO.
As it was happening, the euro began to plunge. That set the tone for markets.
Let’s take a look at the euro. 

Above, you can see the collapse of the euro this morning.
And when we think about this flashpoint of war, the longer-term euro chart tells a story that gives credence to this view of escalation toward WW3.  
The euro traded to a 20-year low today.  While the common currency in Europe launched in 1999, this chart engineers a history based on the member state currencies from the adoption of the euro.  As you can see, the big long-term trendline has broken.
Europe would clearly, continue, to suffer the brunt of the impact of a full blown world war.  And there would be a massive (global) fiscal spending response, which Europe is maybe the least equipped to absorb. 
Is this a message the euro is sending?  Perhaps. 
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