Control Panel: Happy 250th U.S.!

Investment Analysis Clubs Macro Economic Trends and Risks
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Happy Birthday to the United States of America which has just reached our first quarter-millenium!

The DJIA reached an all-time high last week although the SPX and NAZ plateaued. VIX dropped. The Fear & Greed Index was in Fear. The trade was neutral since the SPX and junk bonds have been stable relative to the 10 year Treasury bond price. The bubble continues to inflate.

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The Treasury yield curve flattened. Due to rising inflation, the 3 month and 2 year Treasury yields rose. But the bond market still believes that inflation will be only 2.2% in 5 years. That will take some doing given current inflation and the growing federal deficits.

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The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, was stable and very loose.

The Atlanta Fed’s Latest GDPNow Estimate for 2026:Q2 suddenly plunged to 1.2%. This was due to a sudden jump in the trade deficit. Imports of computers and electronic products have surged massively, now accounting for nearly 30% of all U.S. goods imports (roughly double their historical share from just a few years ago). Also, importers are front-running the expiration of the current 10% blanket tariff regime which is due to expire on July 24, 2026. Other than the huge surge in imports and a small decline in consumer spending the rest of the economy hasn’t changed much.

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https://www.wsj.com/finance/commodities-futures/a-sudden-glut-of-oil-threatens-to-weaken-irans-hand-in-talks-adfcf7c0?mod=finance_lead_story

The very high spending on data centers that is projected for the months and years ahead will increase the trade deficit. Because the trade deficit is included in the calculation of GDP as a subtraction, this will decrease reported GDP growth even if the U.S. economy continues to be strong.

While the Iran war caused the price of oil to spike, potentially undermining the Macro economy, this appears to be ending. Hard to say how long this will last.

A Sudden Glut of Oil Threatens to Weaken Iran’s Hand in Talks

Cheaper, more plentiful crude offers countries a chance to restock more quickly and counter Tehran’s Hormuz leverage

By Rebecca Feng and
Georgi Kantchev, The Wall Street Journal, July 5, 2026

Oil prices have fallen to prewar levels. Tanker traffic through the Strait of Hormuz is recovering fast. Gulf producers are already restarting idled wells.

But one thing will take much, much longer — refilling the world’s oil coffers.

Speed matters. The amount of oil in storage around the world is playing a central role in the U.S.-Iran power dynamics. The faster countries restock their buffers of crude, the weaker Iran’s ability to threaten the world economy by holding the Strait of Hormuz hostage…

Some are predicting oil prices—currently around $70 a barrel—will fall even more in the months ahead, providing further relief to drivers and airlines. Analysts at Macquarie and Citigroup both forecast this past week that prices could sink to $60 in coming months… [end quote]

Though oil prices have declined, natgas and copper prices rose. USD is near the top of its year-long channel. Gold, silver and bitcoin may have bottomed…it’s too soon to tell.

Despite the low GDP growth number (due to the trade deficit adjustment) the real economy is humming along.

Economic activity in the manufacturing sector expanded in June for the sixth consecutive month, say the nation’s supply executives in the latest ISM® Manufacturing PMI® Report. The Manufacturing PMI® registered 53.3 percent in June, 0.7 percentage point lower than in May. The overall economy continued in expansion for the 20th month in a row. (A Manufacturing PMI® above 47.5 percent, over a period of time, generally indicates an expansion of the overall economy.) The New Orders Index expanded for the sixth consecutive month…

Economic activity in the services sector continued to expand in May, say the nation’s purchasing and supply executives in the latest ISM® Services PMI® Report. The Services PMI® registered 54.5 percent, the 23rd consecutive month in expansion territory. Services represent 80% of the U.S. economy.

The options market predicts no change in the fed funds rate in July (80%).

The METAR for next week is sunny.

Wendy

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/june/

https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/may/

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

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Thanks Wendy. In looking through the economic stats, blogger moods, and electoral gershriekings I come ever more frequently to this conclusion:

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More precisely, the “5 year, 5 year forward expected inflation rate”:

… is a measure of expected inflation (on average) over the five-year period that begins five years from today.

So not the rate in 5 years, the average rate for the 5-year period starting in 5 years.

Interestingly, the 5-year breakeven rate, which is the Treasury-implied average inflation rate over the 5-year period starting today, is also about 2.2%.

Yet inflation today is 4%.

For that 2.2% breakeven to be accurate one almost must assume some periods in the next few years with inflation well below 2%.

Difficult to see that happening and difficult to buy nominal Treasurys over TIPS right now for maturities under say 7 years (no opinion on longer terms).

Inflation could normalize closer to 2%, but that hasn’t actually happened the last few years despite Fed efforts.

I thought the US would get back to the low inflation of pre-covid, but not so the last few years have shown.

Inflationary forces of deficit spending and de-globalization appear to be stronger than the deflationary force of technology.

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@mostlylong good post. I gave you a rec.

You probably know (but I’ll mention it anyway) that TIPS principal adjusts for inflation … but the value of the bond if sold before maturity will fall (along with all other existing bond values) if prevailing interest rates rise. And, like all other bonds, the degree of loss in value is larger with longer durations.

So anyone who buys a nominal Treasury is betting that inflation will be =< than 2.2%. Otherwise they will buy a TIPS.

And anyone who buys a TIPS who might need to sell before maturity is betting that bond yields will be =< than they are today. And the longer the maturity, the greater the loss could be if sold before maturity.

Also, the inflation adjustment is to the principal of the TIPS which is paid at maturity. (Sometimes called “phantom interest.”) But the annual inflation adjustment is taxable each year even though only the coupon yield (not the inflation adjustment) is paid to the investor.

Low-yield TIPS, like the 0.125% ones issued during the Covid years when the Fed was suppressing yields, may be cash-flow negative after tax.

I agree with you that it’s “difficult to buy nominal Treasurys over TIPS right now for maturities under say 7 years.” But the government is planning to finance over $30 trillion per year with nominal Treasuries. Treasury Secretary Bessent has said that he plans to front-load the short duration T-Bills. That keeps yields relatively low but opens the risk that (unexpectedly?) yields could rise with time due to stubborn inflation and/ or increasing deficits.

Wendy

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