This is why I can’t take vacations.
I leave you guys alone for just a few weeks and the market panics, rates skyrocket, the Fed is never cutting again, Trump is a lead pipe lock to win, Vandy beats Bama, the Cowboys lost at home by a million, the Eagles haven’t lost, Penn State has twice won on the road, Indiana football is undefeated, dogs and cats living together – mass hysteria!
We got one decent jobs report and the wheels fall off?
- didn’t we spend 30 months talking about how long monetary policy takes to impact the economy? A few cuts are suddenly going to turn the ocean liner around?
- didn’t we spend 24 months talking about how never trust the first version of the jobs report?
- didn’t we spend the last 12 months talking about how inflation in H2 would appear to be reaccelerating but really it’s just the mathematical outcome of measuring against last year’s rapidly plunging numbers? I kept pointing out I needed a lead by the summer in my JMo wager because we knew it was going to happen.
Don’t worry, I’m back. And none too soon, either, because this week we get Core PCE, GDP, and the jobs report. Order in the universe is restored. Michigan can still beat Sparty.
I probably should have come back after the Ohio State game…
Last Week This Morning
- 10T: 4.24%
- German Bund: 2.30%
- 2T: 4.10%
- SOFR: 4.83%
- Term SOFR: 4.71%
- Durable Goods Orders: -0.8% vs -1% expected
- China cut its benchmark lending rate by 25bps
- Fed Speeches
- Logan: “If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals”
- Kashkari: The appropriate path of interest rates will "depend on the data"
- Schmid: Calls for “cautious, gradual, deliberate” rate cuts
- Barkin: Long term borrowing costs are putting downward pressure on demand but it’s unclear how that will affect the November interest rate decision
- Hammack: While it’s not been a straight line of progress towards the 2% goal, but recent readings have “generally improved” since peaking in June of 2022
- I had a birthday and people at the office were genuinely surprised I was at work. What? When did birthdays become a holiday? Didn’t my mom do all the work?
Inflation and GDP and Jobs
Let me put the inflation boogeyman back in the box. Inflation is not reaccelerating. Two weeks ago, just a few days after that bullshit good jobs report, CPI came in 1/10th higher than expected: 2.4% vs 2.3%. The markets freaked out.
Why?
It was still down from 2.5%. It’s down a lot from 9.1%. Are we seriously freaking out over 1/10th of a percent?
On Thursday we get Core PCE. It’s expected to come in at 2.6%. Even if it stays flat compared to last month’s 2.7%, is that reason to freak out?
GDP is forecasted to come in at 3% - great! Does that soothe the stagflation crowd? Don’t we want good GDP? Now, I could argue it’s bullshit overstated because it’s entirely heavily dependent on massive government spending, but at least it’s not 0%, right?
That brings us to jobs. I had to stare down a lot of jobs reports over the last two years, so I’m not about to go all Dak Prescott now and roll over.
Friday’s number is going to be bad. Two hurricanes. A Boeing strike. I am going to ignore last month’s number because…duh…and instead assume 150k-ish is the new normal for now. Throw in those drags and there is a high probability in my mind that Friday’s number comes in below 100k.
Just as with last month’s jobs report, I would caution against overreacting. But if I am right, and by now you know I always am, Friday’s labor report should confirm the slowdown has arrived even if the wheels haven’t fallen off.
That slowdown is why the Fed needs to keep easing off the brakes, rather than change course over one stinkin’ jobs report that wasn’t that great and by now we should all know not to trust and yet we keep overreacting like knuckleheads.
Rates
Markets still have a 95% probability of a cut on November 7th. Plus, 75% for an additional cut in December. And that’s with all the allegedly strong data over the last several weeks. What if this week’s job report comes in weak?
If the jobs report comes out insanely hot, then maybe the Fed pivots out of one of the cuts this year. But I still think there is too much credibility risk by doing that. I could see them tweaking the approach after 1% of cuts and saying, “we eased off the brakes and now we want to reevaluate”, but again that assumes strong eco data.
By now you know I don’t believe that’s the case, so I still expect them to continue cutting this year and a more gradual path next year towards 3%.
It won’t be surprising if the US easing cycle is slower than the global one, so just because other countries are cutting 50bps at a time doesn’t mean we need to. But I do think it helps keep a lid on our own Treasury yields.
If the German bund falls towards 2% at the same time the T10 is testing 4.25%, which one would you buy?
So why did the T10 run up to 4.25%?
One way to think of the T10 is what the market expects Fed Funds to average over the next ten years, plus some term premium.
On 9/16, the market thought the Fed was cutting to 2.8%. The T10 was 3.62%.
Today, the market thinks the Fed will level off at 3.4%. The T10 is 4.24%.
The market backed out 0.6% of cuts and the T10 responded by pushing the T10 up 0.62%.
It’s not magic.
You tell me what the Fed is going to do, and I will tell you where the T10 is headed.
A Trump win, deficits, stronger than expected GDP, sticky inflation, etc…all of that matters. But try to think of it in terms of how it might impact what the Fed will do first. That, in turn, pulls or pushes the T10.
If Trump wins, are rates flat because the move has already happened? If he loses, do they fall? What if this week’s data is weak/cooler than expected? How will that influence the market’s views on Fed policy?
As the market recalibrates expectations for Fed Funds, the T10 follows suit.
The Week Ahead
Buckle up buttercup. Lots of key data reports scheduled for the week ahead including GDP, jobs, and Core PCE inflation.
Top 10 Interesting Things About Iceland
10. There are 784 roundabouts for every citizen. Seriously, the roundabouts have roundabouts.
9. The waterfalls are huge and beautiful. And we saw the OG geyser that all others are named after.
8. The people are nice, but in a genuine way and not an over the top way. You’ll never see an Icelandic flag on the moon, but dammit they’re happy.
7. The language is impossible to learn. There’s just no easy way to ask, “Which way to Hafnarjaroarvegur street?”
6. It wasn’t that crowded. I Googled it and maybe we were there during “shoulder” season (after summer busy time and before winter busy time), but we never had any problem sitting down for a meal or grabbing a coffee.
5. Political correctness hasn’t become a thing yet. We did a Viking museum on a whim and it cracked us up. They talked about one of the Irish women the Vikings had kidnapped who went on to become royalty because, “Although she was dumb, she was pretty.” Or one of the Vikings was, “A tall strong man with an ugly mouth. Also, he was a ginger.” It was refreshing.
4. Lots of driving if you want to see the sights. We would just drive 3 hours in a direction and take it all in. The landscape is incredible, though, so totally worth it. We just rented a car and drove rather than hop on a tour bus. We are so glad we did. It allowed us to pull over whenever we wanted, spend more or less time at a spot, etc.
3. Reykjavik is amazing. It’s small enough to get around, big enough to find lots of stuff to do. If we had direct flights, I would do a long weekend there.
2. The food, particularly seafood, is spectacular. And no fish eyes. I don’t need the authentic experience…give me the tourist version of freshly caught artic char. Also, I couldn’t order the wolffish after googling it. Fish and chips slayed.
1. Northern lights – this entire trip was based on seeing the northern lights. The Real Boss is a photographer by trade and one of her bucket list items was northern lights. As my luck would have it, most of the US was experiencing northern lights right before we left. Our friends in Colorado and Minnesota were sending obnoxiously fantastic photos of them. To make matters worse, the forecast for Iceland was 100% cloud cover the entire time we were going to be there. I was so cranky before we left. “You mean we could have gone to Cleveland for a day and gotten better pictures?” But we lucked out on the very first night. We had been up 36 out of the last 39 hours but we weren’t going to miss our chance. We spent about four hours chasing them for the best shots. They were pretty spectacular. We didn’t see them again the rest of the trip.
One thing I wouldn’t do again – Blue Lagoon. We stayed at the fancy retreat/spa, and it’s not my thing. However dumb you think I look strolling around in a bathrobe and flip flops, it’s so much worse. But even the Real Boss, who likes spas and massages, was underwhelmed. Avoid the tourist trap and spend an extra day in Reykjavik or touring the countryside.
Some photos for those of you interested (you can tell which ones are from Sarah and which ones are my weak attempt to be a photographer).
Halloween Dis(invite)
Not but not least, is a minor clapback. One of our favorite clients invited me to speak at their investor conference. I accepted. They then rescinded said invite once they found someone better. I had flashbacks to my dating days, around 10 B.S. (Before Sarah). I was the 2am lights coming on last resort to begin with, but then they found someone better after they stumbled out the door.
Fortunately for him, I have no pride and I wasn’t offended at all.
Unfortunately for him, I have a newsletter where I like to call people out, even if it’s just a faux slight.
Since his name is Jason, I thought I would make a fun little Halloween themed image of him disinviting me.
More importantly, I know his wife is a Birds fan. I am sending him the same green velour track suit I wore to the Eagles game a few weeks ago. His penance is to make both me and his better half happy while shaming him for the uninvite.
It’s good to be back. I missed you guys.
