I thought the freezing cold of a Penn State playoff game would be the most painful part of the holidays, but that was before I waded into the deep end of gender identity politics with some of my kids…
It was the coldest I’ve been since my Army days, but it was worth it. The game was closer than the score would indicate. SMU moved the ball successfully only to throw two pick 6s in Q1. It was over by half time, but my favorite part of that day is this little gem.
This plane also had Bryson DeChambeau and Craig James on board. I love the idea of a billionaire party plane being turned away by tiny State College airport because they didn’t arrive in time to have parking.
Last Week This Morning
- 10T: 4.63%
- 2T: 4.33%
- SOFR: 4.53%
- Term SOFR: 4.36%
- Durable Goods Orders m/m: -1.1% vs. -0.4% expected
- CB Consumer Confidence: 104.7 vs. 113 expected
- Initial Jobless Claims: 219k vs. 224K expected
It’s that time again. Every uneducated prognosticator puts out predictions for the year ahead. Unlike everyone else, however, mine comes with a Lead Pipe Lock Guarantee™. 60% of the time, I’m right every time.
Lead Pipe Locks™ for 2025
Brokers at the end of 2023.
We went into 2024 with such hope. Bloomberg Rates December 2023: “We see the yield curve remaining inverted for most. If not all of next year, with the long end rallying by end-2024 and the 10 Year Treasury yield falling below 3.5%.” Adorable.
The 10T peaked at 4.7% in the spring, killing any momentum the year had started with. Then in the summer, it became apparent the Fed would finally start cutting rates and the T10 ran down to 3.6%.
Then it surged again and here we are.
Quite the rollercoaster ride. Just as sellers were coming to grips with a new normal, rates plunged in the fall and pressed the reset button.
Since the market refuses to deliver good news, I will shoulder the burden. Here are my 2025 Lead Pipe Lock predictions. At the end, I also do a review of my 2024 predictions. Be forewarned, I was entirely right about everything so it’s probably a waste of your time to see how I fared…
Lead Pipe Lock #1 – The 10 Year Treasury Will Finish Below 4%
Maybe this is just wishful thinking, but I think the 10T is oversold here.
- Inflation is contained enough to not be the main event
- Growth will slow – Republican policies won’t really have much impact until 2026
- Labor Labor Labor Labor Labor
- Most of the globe is dealing with tepid or negative growth (cough cough Germany and China)
- Real rates
It’s important to remember that the US Treasury market is the world’s mattress. It behaves differently than any other asset in the world. Central banks, financial institutions, pensions, etc all have mandates that require a certain amount of Treasury holdings. Heck, our own Fed mandates Primary Dealers bid on Treasurys at every auction.
Here are the Top 10 bond markets in the world. What’s the realistic alternative to the US? Countries 2-10 combined equal US market size. Japan and China are both yielding sub-2%, you dying to snatch those up? I want to be in the room when you pitch buying Brazilian bonds because they are yielding 7%.
The UK has a similar yield but is 1/10th the market size, so there’s only so much money that can flow into that market. And, it’s still just the same yield – it’s not an improvement over the mattress. And their economy is contracting.
Maybe global yields don’t drive US yields lower, but they certainly keep a lid on them.
Speaking of keeping a lid on yields, Real Rates will likely do the same at current levels. The higher the real rate, the more attractive the return. Real Rates are just yields adjusted for inflation.
While those keep a lid on rates, they don’t necessarily drive them lower. So why do I think the 10T will finish 2025 below 4%? Welcome to the Seamless Segue part of the newsletter…
Lead Pipe Lock #2 – Labor Market Deterioration Will Dictate Interest Rates
Even if markets continue to react to NFP as if it’s gospel, you have learned it’s garbage noisy. Plus, over half of the gains are from government/healthcare. What happens when a new administration, hell bent on reducing government spending, stops hiring government positions? Or requires government workers to return to office?
Month after month, we see big downward revisions. The last annual revision added a further downward revision of over 800k. The QCEW, generally considered the most accurate job report (but with a terrible lag), continues to diverge substantially from the headline NFP reports. For the love of all that is holy, stop reacting to the NFP report!
But let’s say you think I’m an idiot and believe NFP is a great indicator of overall labor market health. Here’s the monthly NFP average over the last three years.
2022: 413k
2023: 238k
2024: 190k
Remember, 0 isn’t the Mendoza line. Somewhere around 125k is to keep pace with population growth. In other words, NFP below 125k is contractionary.
Household Survey (UR) last month showed a loss of 355k jobs while NFP showed a gain of 227k. Someone’s lying.
Other fun labor market stuff…
Unemployment Rate – up from 3.4% to 4.2%.
Continuing Claims – up 600k from the first hike and at its highest level in over 3 years. The median unemployment timeline is now 10.5 weeks.
JOLTS – job openings down to 7.7mm from over 12mm.
Unemployment to Employment Flow Index – this measures unemployed people finding employment and is at its lowest level in a decade.
The labor market is in decent shape, but it’s not overheated. More importantly, the trend is worrisome.
The labor market, more than anything else, will dictate Fed policy and interest rates in 2025.
Lead Pipe Lock #3 – The Fed Will Cut at Least 0.75%
This time last year, the Fed projected 0.75% in cuts in 2024. It ultimately delivered 1.00%.
I think the Fed misses by at least one cut again. It is projecting 0.5%, but I think it will be at least 0.75%. That would put Fed Funds around 3.62% this time next year.
It’s important to remember the 0.5% assumes no further economic deterioration. The Fed believes rates are still restrictive, so rate cuts are just easing off the brakes to avoid bringing the economy to a screeching halt.
Even with a strong economy, the Fed will continue us on a path towards neutral. And if I’m right about the labor market, it will cut faster to preserve jobs.
What would it take for the Fed to deliver fewer than 0.5%? Some combination of un-worrisome jobs data and worrisome inflation data. Keeping the streak of Seamless Segues going…
Lead Pipe Lock #4 – Core PCE Will Average Below 3%
China is exporting deflation. Not disinflation, deflation.
In Trump 1.0, tariffs didn’t get enacted until the end of his first year. I think those are a concern for next year.
Oh, and that laggy Shelter component will continue to exert downward pressure throughout the year.
Penn State Inflation tracker. Here’s the PSU Rent component vs the official government stats (aka shelter component).
Here’s the PSU Core PCE vs government data.
Inflation progress might be slow and even temporarily stall out like SMU inside the 10, but that’s not the same as reaccelerating. If the target was 3% instead of 2%, wouldn’t the narrative be entirely different?
Just like early 2024, we may get some worrisome reports early in the year. Ride out the media storm and on the far side of it is an inflation story that is still mostly good.
Lead Pipe Lock #5 – Ohio State Will Win the National Championship
They don’t have to play Michigan. The Ryan Day redemption story. There’s even a non-zero chance they get to win it all against Penn State because of course they will.
Plus, I assume the universe hates me and wants to render this little gem irrelevant.
Why would I use my last Lead Pipe Lock prediction on OSU? The last great segue of the newsletter… My predictions sometimes turn out to be jinxes…
12/18/23 - Lead Pipe Locks for 2024
Lead Pipe Lock #1 - Unemployment will rise above 5%
Like SMU throwing two pick 6’s in the first quarter, this is not a good start. Not only did the UR not hit 5%, It peaked at just 4.35%. I wasn’t even close.
You guys know how I feel about the noisy job data, but the Household Survey (that leads to the Unemployment Rate) is the report I trust more. Credit where credit is due – the Fed engineered a pretty solid 2024 labor market.
Grade: F
Lead Pipe Lock #2 – Core PCE will hit 2%
You know what would be fun? Literally anything else. Same as above, Core PCE bottomed out at 2.6%, nowhere close to 2%.
Grade: F
I sleep better at night knowing I took JMo to the woodshed, however.
Lead Pipe Lock #3 – There will be a recession
The darndest thing happened…I totally forgot to end this prediction with, “…in Germany.” The resiliency surprised me, but I guess that means I underestimated the lasting effect of $5T. Grade: F
Lead Pipe Lock #4 – the Fed will cut at least 1%
I AM AN INTEREST RATE GOD!!!!!
Be honest – in July you thought I was cooked, right? It’s ok, lots of people that sent me hate mail did, too.
Grade: A++++++ in part to offset all the F’s
Lead Pipe Lock #5 – Cap prices will plunge
Plunge ish?
I wrote, “I’m cheating here a little bit because cap prices are already down 25%+ in the last month.” I was writing my predictions as cap prices were already falling. They still fell 25%-50% from there, so I am counting this as a dub.
Grade: B-
Lead Pipe Lock #6 – Higher for longer applies to real rates, not nominal rates
This one ties in nicely with my rate cut projections. I was convinced of the “easing off the brake” analogy. The graph below highlights how “higher for longer” was really Real Rates because the Fed was cutting while Real Rates were surging. Easing off the brakes while keeping things restrictive…well done Fed.
In this graph, Core PCE is as of November so it doesn’t reflect the recent run up in real rates to 1.8%. Rates are restrictive here even as the Fed is cutting.
Grade: B+
Lead Pipe Lock #7 – The T10 will finish the year above 3.25%
This might look like I was cheating, but this time last year the T10 was at 3.90% and falling. I was certain the Fed would cut at least 1% and expected a recession, yet was calling for the T10 to flat line.
The point I was really making was – the big move in the T10 had already happened. It had fallen from 5% to 4%. Even if I was right about rate cuts and economic slowdown, the T10 was already pricing that in.
I definitely didn’t expect it to run back up north of 4.5%, however, so I don’t get to claim a victory here.
Grade: C-, only after I go to office hours and argue the technicality with the professor.
There you have it – a totally infallible outlook on the year ahead. On a long enough timeline, I’m always right.
Before you send me hate mail, just remember: I have no formal training, barely got into a state school before dropping out of said state school, and write these in my pajamas on the weekend.
So…who’s really the knucklehead here?
