After last month’s inflation print, JMo needed Core PCE to average 3.36% through year end to win. Despite all the evidence to the contrary, he’s apparently smart enough to realize that wasn’t happening. He threw in the towel and conceded defeat. If you think this is the part where I tell you I let him off the hook, you don’t know me very well.
In my infinite graciousness, however, I asked him not to pay me. Instead, I asked him to make a donation to a charity near and dear to our hearts – Girls in Tech. We started a scholarship fund last year in memoriam of a teammate that had passed away from cancer. The wager would go to a great cause (instead of more Amazon orders) and JMo would get a tax write off. It was a win win.
Unbeknownst to me, JMo increased the check amount by 50% and mailed it in. And because he’s been working his tail off in southeast industrial for 30 years, the check cleared!
I have given Jon Morris a ton of grief this year and he’s been a great sport about it. We have been close friends for a long time and Beacon Partners was literally Pensford’s first client ever (their signed engagement letter still hangs in my office 15+ years later). JMo is one of the most thoughtful and intellectually curious people I interact with. He also has a fatal flaw that I can relate to – overconfidence.
On the first day of the Wachovia trading floor all those years ago, a trader taught me a valuable lesson about overconfidence. Smoke people out by putting money on it. Profit from their hubris. Now I just need to figure out what his next core belief is and put money on that, too.
Here’s the webinar slide where I unasked JMo by comparing him to Eagles coach Nick Sirianni and Panthers owner David Tepper.
This Week This Morning
- 10T: 3.75%
- German Bund: 2.13%
- 2T: 3.56%
- SOFR 4.83%
- Term SOFR 4.84%
- Inflation
- Core PCE m/m: 0.1% vs 0.2% expected
- Core PCE y/y: 2.7% as expected
- Fed Speeches:
- Bostic: Explained reasoning behind his vote for the 50bp cut citing growing uncertainties regarding the weakening labor market. Emphasized the reduction does not lock in a cadence for further moves.
- Kashkari: Sees a slower pace of cuts ahead
- Bowman: Only member who was against 50bp cut due to inflation fears and is more in favor of a “measured pace toward a more neutral policy stance”
- I went into the writing of this knowing that Tampa would be hugely impacted by Helene, but the stories from western NC keep coming in. Heck, we had teammates with flooded houses in Charlotte and we’re 500nm inland.
- The President of the NCAA called for NIL reform to prevent exploitation of student athletes…lol
Is the Market Ahead of Itself?
I can’t make up my mind. I think the ultimate landing spot is 3%-ish, but the market has us getting there next summer. I thought the Fed should have started cutting a while ago, but even I’m a little surprised by how aggressively the market is pricing in cuts.
On the one hand…if you take the last 5 monthly Core PCE prints and annualize them, guess what you get? 2.0% on the nose.
But on the other hand…GDP keeps surprising to the upside. I wouldn’t expect you to track the delta between GDP and GDI, but it had reached historic levels, implying one of them had to correct. I assumed it would be GDP since GDI is based on actual tax receipts. But last week, an enormous upward revision to GDI closed the gap and suggests a 3% GDP is pretty darn accurate.
- I don’t worry about stocks hitting all-time highs. Stocks typically peak after the recession has begun.
I think jobs outweigh everything else.
We get two jobs reports before the next FOMC meeting. How strong would the job gains have to be for the Fed to not cut at the next meeting? Can you go from 0bps to 50bps to 0bps? I don’t think so, which means they have boxed themselves into a corner or believe there is no chance of being boxed in (eg, they know there’s no chance of a weak jobs report).
What has the Fed seen to make them pivot so aggressively?! Two weeks prior to the last meeting, some members were still talking about no cuts and then they jumped to 50bps? That’s just weird.
Here’s the phrase to keep in mind: “We do not seek or welcome further cooling in labor market conditions.”
Powell said that at Jackson Hole and he will keep referencing it as a reason to quickly get off the brakes.
We get the next jobs report on Friday. The Boeing strike won’t show up until the next jobs report (Nov 1), so there’s a chance of a rebound north of 200k. But the market has finally caught on that it just needs to subtract 68k from the headline number before reacting. Maybe a framework like this:
NFP
Negative to 100k 50bps
101k-350k 25bps
351k+ 0bps
I don’t think they would have done 50bps without a really strong conviction that the jobs report won’t be awesome. Even if it’s north of 250k, I bet they use all their speeches to say, “Hey, that’s nice but in order to keep that up we need to keep cutting.”
Consensus forecast is for a gain of 146k jobs (basically the exact same as last month’s actual) and for the unemployment rate to hold steady at 4.2%.
Rates
The T10 is testing that upper end resistance level of 3.78%-ish. If Friday’s job report comes in surprisingly strong, we could definitely break through. That would make 4% the next ceiling.
Floating rates are headed lower and easing cap costs. CME FedWatch has odds of the Nov 7th meeting at basically a coin toss between 25bps and 50bps. A weak jobs number this week would push the market to 50bps.
The Week Ahead
About 800 Fed speeches and the jobs report on Friday. Somehow, tomorrow marks the start of Q4 2024.
