The US can't afford much higher interest rates.
Here's why: Over the next 12 months, the US Treasury must refinance roughly $8 trillion of debt. The average interest rate on that debt is about 3.3%. Today, the 1-year Treasury yields around 4%. Simply refinancing that $8 trillion at current rates would increase annual interest costs by roughly $50 billion. And that's before accounting for interest on an ongoing $2 trillion annual budget deficit. This is why today's fiscal backdrop is fundamentally different from the early 1980s. When Paul Volcker raised rates into the double digits, the US had already benefited from years of high inflation that dramatically reduced the debt burden relative to the economy. Today, debt levels are far higher. Every percentage point increase in borrowing costs has a much larger impact on the federal budget. The Fed isn't just fighting inflation anymore. It's operating with one eye on a balance sheet that has become increasingly sensitive to higher rates. The higher rates stay, the more expensive America's debt becomes. Source: Lukas Ekwueme @ekwufinance FT
The K-Shaped economy:
Source: Hedgeye, Bloomberg
Real yields continue to go vertical. Now at two-year highs.
In an economy facing a mountain of debt, this is not a great development... The new Fed Chair does not have an easy job... Source: Tavi Costa
While financial markets have priced in the peace deal, shipping markets have not... with Freight rates still 3x pre-war levels...
Source: zerohedge
If you denominate US GDP in gold instead of dollars, the chart is wild.
Source: Lyn Alden
The SuperCore PPI (i.e., no food, energy or trade) has been accelerating for 11 months.
Source: Bernstein Advisors
Margin Debt as a % of M2 is now at its 2nd highest level in history, just behind the Dot Com Bubble
Source: Barchart
US PPI inflation for May came in hotter than expected at the headline level but softer at the core level (please see the Bloomberg table below).
Echoing yesterday’s CPI data, this suggests that the PPI spillover from energy into broader prices remains relatively muted for now. It also suggests that the pass-through from PPI to CPI is being offset by margin pressure. Source: Mo El Erian, Bloomberg
