“The Federal Reserve Bank of Kansas City hosts dozens of central bankers, policymakers, academics and economists from around the world at its annual economic policy symposium in Jackson Hole, Wyoming.”
At some point, not getting the invite starts to feel intentional. But I’ve never let that stop me. Just a few more practice landings and I am there next year with or without the invite!
This Week
- 10T: 3.94%
- German Bund: 2.23%
- 2T: 4.05%
- SOFR 5.34%
- Term SOFR 5.33%
- Fed Speeches
- Bostic – Fed needs a little more data needed to support cutting rates
- Goolsbee – Growing more concerned about employment
- Musalem – Rate cutes are nearing as risks come into balance
- CPI y/y 2.9% vs. 3.0% expected
- Retail Sales m/m 1.0% vs. 0.3% expected
- UMICH Consumer Sentiment 67.8 vs. 66.9 expected
- First student loans and now down payments on homes? The federal government is starting to make this dad of five feel less relevant…
Jackson Hole - Friday
Several Fed speakers throughout the week will tee up Powell’s comments on Friday. Unlike Australia’s B-girl Raygun, I expect this to be a carefully choreographed dance to gently signal a 25bps cut next month. The markets have a 25% chance of a 50bps cut, but that feels too high for me. And remember, this is coming from the guy that thought they should have cut by now.
The Fed will have another jobs report in hand at the next meeting, so Powell will be unlikely to commit too much one way or the other.
The theme this year is “Reassessing the Effectiveness and Transmission of Monetary Policy.” Some of the things they might touch on:
- Is 2% the right target? Wouldn’t a range be a better goal?
- Are the long and variable lags shorter than they used to be?
- How can the Fed be more proactive than reactive?
- Can too much communication be a bad thing?
I think there’s a chance the market comes out of Jackson Hole disappointed. Why would Powell signal anything concrete about the pace of cuts ahead of next week’s Core PCE? Or the following week’s jobs report.
When Will the Punchbowl Run Dry?
The Retail Sales surprise caused a minor rally but didn’t cause the T10 to break out of the range. Right now, I think only three things can do that:
- Jobs
- Core PCE
- Powell speak
I’m glad Americans are still spending money, but it’s the source of that spending that causes concern. The NY Fed puts out a quarterly report on consumer debt.
Credit card debt is on the rise as consumers run out of the cash the government dropped out of a helicopter. Notice how other types of debt are flat as credit card accounts climb.
But with rates at levels most American consumers don’t remember, credit card delinquencies are also climbing.
The SF Fed released a paper last week that contrasts “extra wealth” with delinquencies. As you might expect, low income earners are upside down.
Perhaps more surprising, however, is that a similar trend is now showing up among top income earners.
I believe there are two reasons why these red flags have not yet caused a more significant slowdown in consumer spending.
Reason 1 – Fixed Rate Home Mortgages
Plainly put, fixed rate mortgages are keeping the average household DSCR below historical averages. Here’s a great graph the SMBC research team put out last week.
Reason 2 – Jobs
I believe the psychology of the hot labor market keeps people spending. Even as the money in the bank account dwindles, people keep spending because they expect to have a paycheck next month.
That works until…
- Credit limits are reached
- The psychology of the labor market changes
With unemployment up nearly a point in the last year, I think they psychology is going to shift.
Can the Fed ease off the brakes enough to avoid moving from “hiring slowdown” to “layoffs”?
The Week Ahead
Pictured below is the type of house first time homebuyers can purchase in the Kansas City suburbs with the $25k we all will be helping subsidize next year. The dramatic backlighting softens the socialism vibes.
